Hong Kong securities watchdog to clamp down on \\\'dark pools\\\'

HONG KONG, Aug 1 (Reuters): Hong Kong's securities watchdog has warned banks it will clamp down on exchange trading platforms known as dark pools in a direct fallout from a contentious lawsuit against Barclays Plc in the United States, people familiar with the matter told Reuters.
The increased regulatory scrutiny by Hong Kong's Securities and Futures Commission (SFC) could hurt prospects for the nascent dark trading market in the Asian financial center and may trigger similar action by other regulators in the region, they added.
Banks in Hong Kong have sought legal advice following a confidential meeting convened by the SFC's supervisory department last month, during which the watchdog told firms it would step-up scrutiny of dark pool marketing materials, one person said.
The regulator also warned it would focus more closely on potential conflicts of interest that may prevent investors from being treated fairly when using dark pools, these people added. The meeting was attended by the heads of compliance at the major banks, according to one person who was present at the meeting.
The SFC declined to comment. Sources also declined to be identified as discussions with the regulator were private.
Dark pools are private share-trading venues that allow investors to buy and sell stocks anonymously, with prices displayed after a transaction has taken place. They have attracted increasing scrutiny in recent years, amid claims by exchanges, regulators and lobby groups that they distort market pricing and disadvantage traditional investors.
According to the people, the warning by the Hong Kong regulator stems from Barclays' dark-pool trading problems in the United States.
Barclays is fighting a lawsuit filed by the New York attorney on June 25 alleging the bank's marketing materials misled clients on the precise nature of trading in its dark pool. The lawsuit accuses the Barclays dark pool of giving high-frequency traders - firms that use sophisticated computer models to trade in and out of shares in a fraction of a second - an unfair advantage over investors. Barclays says its customers were never misled.