It was big news when HSBC announced it would open up a planned dark pool in Hong Kong to retail investors as well as institutions. Some greeted the news as a sign that the trading technologies that are available to the big boys are indeed filtering down to the little guys, some of whom are essentially professionals trading personal accounts. HSBC may have underestimated the regulatory reaction as it has recently been forced to change its tack. It will now launch the dark pool only to professionals. 

Of course, the regulatory circumstances in Hong Kong and in the U.S. are vastly different, as are the respective market structures. But the news serves as a reminder that dark pools at home and abroad have moved aggressively to add retail order flows to their networks, even as regulators remain broadly protective of lit markets. 

In many cases, the efforts to add retail order flow to dark pools have been more successful than in Hong Kong. In the U.S., for example, several dark pools have moved in this direction. Abroad, Knight Match Europe has recently co-mingled retail and institutional order flow. And the Alpha Group has recently launched its Alpha IntraSpread dark pool in Canada, which also includes retail flow. 

The Alpha Group proposal is worth mentioning in part because it had long been bitterly criticized because of its internalization support. It was indeed originally intended as an internalization mechanism for big dealers. After the main exchanges complained, the proposal was revamped so as not to include internalization, but that remains a hot issue. As it stands now, the new ATS promises price improvement to all retail investors. The system allows only retail order flow to trade aggressively in the dark pool, as institutional orders must rest passively, waiting to interact with retail orders. The idea is to give institutions access to pure retail order flow, allowing for unconflicted benefits for both. There is no rebate for liquidity providers, while the system will pay for order flow from retail sources.    

As for the U.S., the debate continues. So far we have yet to see an explicit attempt to create a super-retail-friendly dark pool, though we have seen various exchanges experiment with various fee structures to attract this order flow. We may yet see more regulations aimed at creating more transparency by dark pools, even in the face of signs that such venues continue to reduce costs for all investors. -Jim