Reply to PQ on Regulatory Framework for Dark Pools
Question No. 55 Notice Paper No. 308 of 2009 For Written Answer
Date: For Parliament Sitting on 12 January 2010
Name and Constituency of Member of Parliament Mdm Ho Geok Choo, MP for West Coast GRC
Question: Mdm Ho Geok Choo: To ask the Senior Minister with the emergence of dark pools which allow trading of stocks to occur away from public eyes and off central exchanges (a) how will the Ministry deal with the regulatory issues that these dark pools are likely to throw up; and (b) how will the Ministry address issues such as insider trading if investors are allowed to trade anonymously.
Answer: 1. Dark pools, otherwise known as crossing networks, are an alternative trading venue where institutional investors can transact large blocks of shares that are listed and traded on stock exchanges. Concerns that have been raised about crossing networks include possible market fragmentation and a lack of transparency.
2. The Monetary Authority of Singapore (MAS) recognises these concerns and has brought crossing networks under its regulatory regime for recognised market operators1 since September 2007. These market operators are permitted to offer trading access only to institutional investors, and have to comply with the relevant statutory obligations. These include ensuring that the market is fair and orderly; managing any risks associated with its business and operations prudently; and not acting contrary to the interests of the public.
Market Fragmentation 3. Currently, orders above S$150,000 or 50,000 shares can be executed off the Singapore Exchange (SGX) as SGX members can negotiate such orders directly with each other. These off-exchange trades are subject to relevant SGX trading rules which require a trade to be reported to the Exchange within 10 minutes of execution. SGX’s rules seek to balance the ability of institutional investors to execute large transactions, minimising market impact costs2, with the overall requirements of market transparency and integrity. MAS has required crossing networks to match only large orders that comply with the SGX off-exchange thresholds. As an additional measure to prevent liquidity in the exchange from being fragmented by the crossing network, MAS has set limits on the volume any crossing network can trade in any single SGX-listed share.
Transparency and Surveillance 4. Crossing networks are required to submit regular trade reports to MAS and maintain an audit trail of their trades. In addition, they have to report each trade to SGX to ensure consolidated post-trade transparency. This information forms part of a share’s turnover, which is reported to the public. As part of its regular market surveillance and enforcement work, SGX is responsible for the detection of irregular trading and follow-up on suspicious trades, including possible insider trading. This applies to transactions put through crossing networks. Following its initial investigations, SGX will refer the case to MAS, where necessary. MAS has statutory powers to obtain information, including the identity of the investor. MAS therefore does not consider crossing networks to pose additional concerns on insider trading.
5. Crossing networks provide an efficient channel for institutional investors to deal in large blocks of shares. MAS will continue to monitor the development of crossing networks in Singapore as well as global regulations relating to these entities, and review our regulatory regime if needed.
1 The recognised market operator regulatory regime caters to markets including traditional exchanges and trading facilities which pose lower systemic risk to Singapore.
2 Market impact costs refer to the change in market price as a result of a large order that is placed on the exchange. It is the difference between the transaction price and what the market price would have been without the large order.