Published On: Wed, Aug 10th, 2011

HSBC Puts Retail Investor Dark Pool On Ice

Banking giant HSBC Holdings PLC put its plans to launch Hong Kong’s first-ever dark pool for retail investors on ice, it said Tuesday, dimming prospects for the development of alternative liquidity pools in the Chinese territory.

The U.K.-based bank said it decided to launch its controversial StockMax dark pool, which was originally marketed to retail customers, to institutional and professional investors only for now.

“The Hong Kong authorities need a bit more time to fully consider the role of alternative forms of liquidity for the market,” said Ian Cohen, managing director at the bank. “We’re engaged with the regulators, the Treasury and others to position the role of dark pools in the market going forward,” he said.

Dark pools—which let customers anonymously execute large block trades, reducing the risk that information leakage could affect prices as orders are processed—have been popular with institutional investors in Hong Kong.

HSBC’s plans to extend the service to retail investors had been heralded by some market participants because the pools can save them money by allowing them to achieve narrower spreads between bid and offer prices than those available on Hong Kong Exchanges & Clearing Ltd., which were on average 24 basis points in July according to ITG. The broker and dark-pool provider said its Posit Marketplace, which connects most of the institutional dark pools operating in Hong Kong, achieved an average price improvement of 12 basis points on trades last month.

But industry participants said Hong Kong’s local brokerage community opposed HSBC’s plan, arguing it could drive them out of business. A number of local brokerage firms, the Institute of Securities Dealers and the Hong Kong Securities Association declined to comment or didn’t return calls.

A spokesman for the Hong Kong Treasury declined to comment on the HSBC dark pool, saying, “with the recent developments of dark pools in the U.S. and Europe, regulators over the world are studying how regulation of dark pools should evolve in response.”

“It’s a great shame that HSBC has caved to pressure from the government on this,” said shareholder activist David Webb on Tuesday.

He wrote on his personal weblog over the weekend that the exclusion of retail investors from such systems “has been an unnecessary and protectionist measure” for Hong Kong’s monopoly exchange operator and that offerings such as StockMax should include retail investors so they can benefit from better pricing opportunities.

Dark pools for retail investors are common in other markets such as the U.S. and Europe, said Chris Jenkins, Asia Pacific managing director at dark pool operator Tora Trading. “The concept of having to route all trades through a primary exchange is very Hong Kong,” he said, adding that non-local retail investors will still have access to dark pools through foreign brokers.

-By Kate O’Keeffe, Dow Jones Newswires

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