The regulator has imposed a fine on the securities arm of the European bank for failings relating to dark pools trading.

A Hong Kong regulator has fined part of BNP Paribas $15 million for failures over what are called its dark pool trading services.

Dark pools are networks allowing market participants, such as large institutions, to buy and sell big orders without alerting other traders and thereby affecting the price and exploiting any shift. Dark pools have faced criticism for their alleged lack of transparency.

The fine was imposed on BNP Paribas Securities (Asia) by the Securities and Futures Commission.

“BNP Paribas Securities (Asia) Limited has cooperated with the Commission throughout the investigation and has conducted a thorough review of the matter. It has taken steps to strengthen the BNP Internal Exchange (BIX) so as to prevent the problems from happening again and to deliver enhanced quality services to its clients," the bank told WealthBriefingAsia in an emailed statement.

The disciplinary action follows an SFC investigation into BNPP Securities Asia’s dark liquidity pool trading services, known as the BNP Internal Exchange, or BIX.

The regulator said it found that BIX did not operate as represented in materials provided to clients. BIX services were suspended in April 2011 by the French firm after it found 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, the regulator said in a statement.

“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,” it continued.

The regulator said that BNPP Securities Asia failed to maintain sufficient trade records relating to BIX that identified the specific auction in which each order participated and 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, it 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,” Mark Steward, SFC executive director of enforcement, said.

The SFC took into account that BNPP Securities Asia co-operated with the SFC in resolving the SFC’s concerns and that, since 2012, BNPP Securities Asia has obtained consent from clients before allowing their orders to be matched in the BIX. It also noted that BNPP Securities Asia had taken steps to rectify the matching logic in the BIX in 2011. It also noted that BNPP Securities Asia agreed to engage an independent reviewer to conduct a forward-looking review of the operation of the BIX; and BNPP Securities Asia has an otherwise clean disciplinary record in relation to its business in "Type 7" regulated activities. (Type 7 refers to automated trading services.)