Hong Kong watchdog fines JPMorgan for dark pool, control failures

[December 15, 2015]  By Michelle Price

HONG KONG (Reuters) - Hong Kong's securities watchdog said on Tuesday it had fined JPMorgan HK$30 million ($3.87 million) for a range of control failures, including breaches in its dark pool business.

The U.S. bank is the latest institution to fall foul of a broader crackdown by the Securities and Futures Commission (SFC) on electronic trading and dark pools in the financial center.

The SFC said in a statement published on Tuesday the bank's Hong Kong broking business had mistakenly routed principal orders into its off-exchange dark pool trading platform, despite advising the SFC the pool only matched client trades.

Control failures also led the bank's broking and securities units to breach the rules governing how short sale trades are aggregated and documented. The SFC also found that 14 principal traders had been given incorrect access rights allowing them to see client orders.
 

The breaches occurred between May 2010 and December 2012.

"We have fully co-operated with the SFC and are pleased to have resolved these legacy issues in relation to certain aspects of our systems and controls in the institutional equities business in Hong Kong," a spokeswoman for JPMorgan said in a statement. "The firm has strengthened its internal systems and controls to ensure compliance with the prevailing rules and regulations."

She added that the fine does not affect the bank's ability to continue serving clients.

JPMorgan is the latest bank to be penalized for failings in its Hong Kong electronic trading franchise after the SFC stepped up scrutiny of this business amid a global regulatory push to clamp down on automated trading and dark pools.

Dark pools are off-exchange share trading platforms that allow investors to keep their orders secret, with prices displayed after a transaction has taken place.

French lender BNP Paribas' Asia unit paid HK$15 million ($1.9 million) to the SFC for dark pool control failures in August, while HSBC was fined HK$5 million ($640,000) in 2013 for providing inaccurate information about its dark pool.

Critics of the platforms say they distort public markets and disadvantage traditional investors, while their proponents say they offer an important source of liquidity.

The total SFC fine, which comprises three separate penalties levied on the bank's three separate broking and securities Hong Kong entities, is one of the largest ever issued by the SFC, although it remains small compared with U.S. and European penalties.

(Reporting by Michelle Price; Editing by Ryan Woo and Muralikumar Anantharaman)

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