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(Corrects 1st bullet point to say SFC, not SEC)
* SFC held confidential meeting with dark pool operatorslast month
* Regulator to focus on conflicts of interest
* Hong Kong home to Asia's third-biggest dark pool market
By Michelle Price
HONG KONG, Aug 1 (Reuters) - Hong Kong's securities watchdoghas warned banks it will clamp down on exchange tradingplatforms known as dark pools in a direct fallout from acontentious lawsuit against Barclays Plc in the UnitedStates, people familiar with the matter told Reuters.
The increased regulatory scrutiny by Hong Kong's Securitiesand Futures Commission (SFC) could hurt prospects for thenascent dark trading market in the Asian financial center andmay trigger similar action by other regulators in the region,they added.
Banks in Hong Kong have sought legal advice following aconfidential meeting convened by the SFC's supervisorydepartment last month, during which the watchdog told firms itwould step-up scrutiny of dark pool marketing materials, oneperson said.
The regulator also warned it would focus more closely onpotential conflicts of interest that may prevent investors frombeing treated fairly when using dark pools, these people added.The meeting was attended by the heads of compliance at the majorbanks, according to one person who was present at the meeting.
The SFC declined to comment. Sources also declined to beidentified as discussions with the regulator were private.
Dark pools are private share-trading venues that allowinvestors to buy and sell stocks anonymously, with pricesdisplayed after a transaction has taken place. They haveattracted increasing scrutiny in recent years, amid claims byexchanges, regulators and lobby groups that they distort marketpricing and disadvantage traditional investors.
BARCLAYS LAWSUIT
According to the people, the warning by the Hong Kongregulator stems from Barclays' dark-pool trading problems in theUnited States.
Barclays is fighting a lawsuit filed by the New Yorkattorney on June 25 alleging the bank's marketing materialsmisled clients on the precise nature of trading in its darkpool. The lawsuit accuses the Barclays dark pool of giving high-frequency traders - firms that use sophisticated computermodels to trade in and out of shares in a fraction of a second -an unfair advantage over investors. Barclays says its customerswere never misled.
Dark trading in Asia lags the U.S. and Europe where darkpools account for around 17 percent and 10 percent of turnover,respectively. Japan is the biggest market for these privateshare trading platforms in the region, accounting for nearly 9percent of turnover, with dark trading in Australia at around 6percent, and 2 percent in Hong Kong.
This week, Germany's' Deutsche Bank andSwitzerland's UBS AG disclosed that they are alsobeing investigated by U.S. authorities over whether they gave anunfair advantage to high frequency firms trading in their darkpools.
Carole Comerton-Forde, professor of finance at MelbourneUniversity, who has conducted extensive research into dark poolrules introduced in Australia last year, said Asian regulatorshad been watching regulatory developments in the U.S. and Europeclosely.
"I would imagine big buy side firms are asking for moredisclosure around what is in Asian dark pools, and even more soafter the Barclays stuff," she said.
Hong Kong is home to 16 broker-operated dark pools,according to the SFC. In February, the watchdog issued a formalconsultation proposing tighter controls for dark pools, but nonew rules have been decided. (Reporting by Michelle Price; Editing by Denny Thomas and ShriNavaratnam)
