The Securities and Futures Commission (SFC) has fined BNP Paribas Securities (Asia) Limited (BNPP Securities Asia) $15 million for failures in relation to its dark liquidity pool trading services (Note 1).
The disciplinary action follows an SFC investigation into BNPP Securities Asia’s dark liquidity pool trading services, known as the BNP Internal Exchange (BIX). The SFC found that:
BIX 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. This potentially affected all BIX auctions with two or more orders at different order prices and did affect some BIX auctions (Note 2);
BNPP Securities Asia suspended BIX services in April 2011 upon the discovery that order matching was not conducted according to order price priority. BIX services were not fully restored until seven months later and the SFC was not informed of the suspension until 21 months later in January 2013. This constitutes a breach of BNPP Securities Asia’s licensing condition (Note 3);
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 was not notified about the change of BNPP Securities Asia’s business plan as required (Note 4); and
BNPP Securities Asia failed to: (i) maintain sufficient trade records relating to BIX that identified the specific auction in which each order participated; and (ii) coherently document the matching logic, to explain the matched trades. This means it is difficult to calculate the precise impact of the failure to implement a trade execution process where order priority is based on price (Note 5).
Mr Mark Steward, the SFC’s Executive Director of Enforcement, said “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.”
In determining this disciplinary action, the SFC took into account that:
- BNPP Securities Asia co-operated with the SFC in resolving the SFC’s concerns;
- Since 2012, BNPP Securities Asia has obtained consent from clients before allowing their orders to be matched in the BIX;
- BNPP Securities Asia had taken steps to rectify the matching logic in the BIX in 2011;
- BNPP Securities Asia agreed to engage an independent reviewer to conduct a forward-looking review of the operation of the BIX (Note 6); and
- BNPP Securities Asia has an otherwise clean disciplinary record in relation to its business in Type 7 regulated activities.
- BNPP Securities Asia is licensed under the Securities and Futures Ordinance (SFO) to carry on business in Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 6 (advising on corporate finance), and Type 7 (providing automated trading services) regulated activities.
- As a licensed corporation, BNPP Securities Asia has to exercise due skill, care and diligence in conducting its business in regulated activities and to act in the best interests of its clients under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). (See also Note 5)
- Among the licensing conditions imposed on BNPP Securities Asia’s Type 7 regulated activities, BNPP Securities Asia was required to notify the SFC of any incident of material service breakdown or disruption of the operations of BIX affecting its users.
- Section 4 of the Securities and Futures (Licensing and Registration)(Information) Rules provides that a licensed corporation shall give notice in writing to the SFC where there is a significant change in its business plan provided to the SFC under Part V of the SFO within seven business days after the change. According to General Principle 7 and paragraph 12.1 of the Code of Conduct, BNPP Securities Asia was required to comply with all applicable laws and regulations.
- As a result, the SFC is unable to calculate the exact number and extent to which BIX auctions were affected.
- The enhanced regulatory regime on alternative liquidity pools will come into force on 1 December 2015.