Dark Pool No Longer for Individual Investors

On 15 May 2015, SFC released consultation conclusions on proposals to enhance and unify the regulatory regime for alternative liquidity pools (ALPs). ALPs are commonly known as "dark pools". Unlike “lit” trading venues, they do not provide for pre-trade price and volume transparency.

Highlights of the enhanced regime include:

• no individual investors (including individual professional investors and their wholly owned investment holding corporations) will be allowed to use ALPs;
• client facilitation orders will be treated as proprietary orders, which will have a lower execution priority in ALPs than agency orders; and
• there will be no mandatory "opt-in" requirement before client orders can be routed to ALPs, but ALP operators should permit their clients to opt out of having their orders transacted in ALPs. [This requirement is obviously originated from the previous disciplinary action against HSBC Securities.]

The new regime, which involves amendments to the Code of Conduct, will come into effect on 1 Dec 2015. This is a new game plan.

Unlicensed Advising by Holding Courses

As announced by SFC on 11 May 2015, the Eastern Magistrates Court convicted Hong Kong Game Theory Association Limited and Mr Sze Ching Lok, its sole director and shareholder, of advising on futures contracts without a license following a 10 day trial. Sze was sentenced to one month’s imprisonment suspended for two years, while Hong Kong Game Theory was fined $7,000.

Between July and August 2010, Sze ran courses via Hong Kong Game Theory on trading in Hang Seng Index futures contracts in which real time investment advice was provided to attendees as to when and at what price to trade the futures contracts. This constituted advising on futures contracts, a regulated activity under the SFO, but both Hong Kong Game Theory and Sze were not licensed to do so.

Hong Kong Game Theory and Sze were acquitted of another two counts of unlicensed dealing in securities as the Magistrate gave the defendants the benefit of the doubt that Sze and the investor involved might have worked as partners in trading the stock options concerned.

Holding of investment courses in general is not prohibited by the SFO, but this is another story if the course is giving advice on how to invest in particular products.

Subsequent update on 29 Jun 2017:

• The Court of First Instance dismissed the appeal of Hong Kong Game Theory and Sze against their convictions for carrying on a business in advising on futures contracts without a licence.
• In dismissing the appeal, Deputy High Court Judge C P Pang ruled that there are no merits in any of the grounds advanced on behalf of Hong Kong Game Theory and Sze and their convictions are not unsafe nor unsatisfactory.
• While the Court also dismissed Hong Kong Game Theory’s appeal on sentence, holding that a fine of $7,000 is not manifestly excessive, it allowed Sze’s appeal against his suspended imprisonment sentence and replaced it with a fine of $5,000.