More Dark Pool Shenanigans

Dark pool violations and their subsequent fines by regulators are becoming common place events in the US.  Recent violations included UBS being fined $14 million for dark pool  violations, Barclays being investigated by the NY AG for disclosure issues surrounding their dark pool, ITG pending a huge $20 million fine for dark pool shenanigans and a report last week that the NY AG is prepping a case against Credit Suisse’s Crossfinder dark pool.

Well, just to prove that the US is not the only place in the world where dark pools have run amok, Hong Kong’s securities regulator has just fined a major French bank for dark pool violations.  The fine was levied against BNP Paribas SA’s local unit in the amount of HK$15 million ($1.9 million) for breaching rules that set out how its dark pool should operate.   The SFC found that:

– BIX (BNP Internal Exchange) did not operate as represented in materials provided to clients. In effect, BNPP Securities Asia represented that orders would be executed in accordance with order price priority, e.g. a buy order with higher price would have priority over a buy order with a lower price. In reality , BIX failed to give priority to higher priced orders and treated all orders as having equal priority with allocations on a pro rata basis between November 2009 and April 2011

– BNPP Securities Asia’s business plan for its licence application for providing automated trading services stated that client consent would be obtained before their orders were placed to the BIX for matching. However, client orders intended for execution on the Stock Exchange of Hong Kong were automatically enabled on the BIX without BNPP Securities Asia seeking positive client consent.

The SFC’s Executive Director of Enforcement had this to say about dark pools:

No one should dive into dark water without knowing what is hidden. Operators must have clear rules and procedures in place for operating dark pools, and equally important, they should operate consistently with representations to clients whose consent to enter the dark pool is clear and well-informed.”

We agree but should we really be surprised that banks and brokers who operate these lightly regulated entities are continuing to get caught with their hands in the cookie jar?  Back in 2009, the SEC realized there was a problem with the proliferation of dark pools and proposed more oversight but they never voted on this proposal (most likely because the industry wrote many comment letters against the rules).  We believe that the SEC needs to take action by dusting off their 2009 Regulation of Non-Public Trading Interest and put it to a vote.