Watchdog says Hong Kong market must adapt Hong Kong's stock market must adapt to the growth of high-frequency trading and "dark pools," the territory's securities watchdog said, hinting that the local exchange may face challenges to its dominance in share trading. The comments, by Ashley Alder, chief executive of the Securities and Futures Commission (SFC), highlight how the rapid advance of alternative trading systems in the US and Europe - which rattled incumbent exchanges - is starting to encroach on some key Asian markets. IN FT Trading Room In Japan and Australia, exchanges have been forced to upgrade their trading systems and introduce special services to attract high-frequency traders. However in Hong Kong the exchange, Hong Kong Exchanges & Clearing (HKEx), enjoys a near-monopoly in share trading, partly thanks to rules enshrined in a local ordinance stipulating that all trades must be reported to the exchange. Mr Alder said there was evidence of competition emerging in Hong Kong, including 15 "dark pools" licensed to operate in the territory. They accounted for about two per cent of total market turnover. There is almost no HFT on HKEx's cash equities market, largely because the territory's stamp duty has so far deterred such traders. However Mr Alder said there was "evidence of HFT-like activity in the warrants market." Warrants are a popular exchange-traded financial instrument akin to options. They account for 28 per cent of total equity market turnover in Hong Kong, the SFC says. "It's quite clear that Hong Kong will need to adapt to a fast-changing business environment," Mr Alder told a trading conference organised by FIX Protocol, which runs a messaging system widely used by traders. However, he cautioned that Hong Kong would not copy what regulators in the US and Europe had done before the 2008 crisis by breaking the national monopolies of exchanges, which allowed rival platforms to proliferate. Our stance is pretty clear: we encourage choice in products and services by different platforms. We recognise that alternative trading styles can offer efficiencies. "But we are very keen on making sure there is a level playing field," Mr Alder said. He said that regulators abroad, having unleashed competition in share trading were "working out what to do with it." Critics of market reforms in the US and Europe that allowed competition say trading has fragmented across too many venues. The World Federation of Exchanges argues that too much trading takes place on dark pools, making markets opaque for many investors. Competition is possible in Hong Kong through two routes: banks can apply to the SFC to launch "internal crossing systems" - a kind of dark pool; or overseas exchanges are allowed to market their services in Hong Kong if they obtain an "alternative trading licence" from the SFC. Asked if he was in favour of more competition against HKEx, Mr Adler told the Financial Times: "There is already the ability to compete, the question is how that market will develop. There is no doubt that Hong Kong's going to innovate. Mr Alder predicted that the outcome in Hong Kong was likely to be "convergence" between what had happened in the US and Europe and preservation of the status quo in Hong Kong. "Ultimately it's really a question of Hong Kong working out what's right for it," he said. The SFC has since November been working on "guidelines" for how algorithmic trading and "direct market access" (DMA) should develop in Hong Kong. DMA is a system where traders get access to an exchange by piggybacking on a broker's existing membership of the exchange. It is widely used in the US and Europe by HFTs as a way to trade on exchanges and is growing rapidly in certain Asian markets. Mr Adler declined to say when the guidelines would be out.