Dark Pools: Hong Kong Regulator Probes Controversial Trading Arenas After Barclays US Backlash

Hong Kong financial regulators are reportedly set to get tougher on the controversial "dark pools" where secretive high frequency trading takes place.

The Hong Kong Securities and Futures Commission (SFC) met with banks in the Asian finance hub and said it would increase its scrutiny of the marketing of dark pools to clients, according to a Reuters report citing anonymous sources with knowledge of the situation. The SFC would not comment.

It follows a legal wrangle between Barclays and a US regulator over the bank's own dark pool trading platform. Dark pools let big money traders – such as institutional investors – privately buy and sell shares in large blocks and does not disclose prices or identities until after deals are done.

New York Attorney General Eric Schneiderman opened a lawsuit against Barclays over its dark pool. His office claims that Barclays told clients that their money being invested through its dark pool platform meant it was protected from market "predators".

These are traders who use cutting edge technology to conduct high-frequency trading that gives them a serious advantage over competitors, where a second's difference can mean big money.

But Schneiderman said such predators were invited to use Barclays' dark pool by the bank itself, where they could trade quickly and privately by not disclosing the price, meaning its investors were losing out by not using public stock exchanges.

"The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit," said Schneiderman.

Barclays has denied the allegations, arguing the regulator did not demonstrate any evidence of fraud and that the suit should be thrown out.

Dark pools and high-frequency trading came to public attention with the publication of Flash Boys, an explosive non-fiction book by Michael Lewis in which he claims the markets are being rigged by those with the best technology.