The Securities & Futures Commission is monitoring the operation of 10 "dark pools" in Hong Kong, which have raised concern in their trading of Hong Kong securities.

Secretary for Financial Services & the Treasury Prof KC Chan told legislators today a dark pool is a major category of alternative trading venues - facilities allowing securities transactions to occur outside traditional exchanges.

"They are opaque due to the lack of pre-trade transparency - i.e. bid/ask prices and the identity of the parties quoting those prices are not displayed - and post-trade transparency - i.e. the details of executed trades are not disclosed to the public. This is to cater for the need of institutional investors and others that seek to execute large trading interest in a manner that will minimise impact to market price."

Hong Kong's dark pools are mainly a broker's or bank's internal crossing engine whereby customer orders are channelled to the internal pool for matching, or internalisation, before they are routed to the exchange market. It is estimated transactions executed in these dark pools represent less than 3% of total market turnover.

Prof Chan said the Government is aware of the pools' emergence, and of the concern raised over the lack of transparency which can create a two-tiered market that deprives the public of information about stock prices and liquidity.

Reviews of the regulation of dark pools have been conducted in the US and Europe but new regulatory requirements are yet to have been introduced. He said the Government will monitor global developments on regulating dark pools and review Hong Kong's regulations if necessary.