HONG KONG : The chairman of Hong Kong's stock exchange has warned that alternative trading platforms such as "dark pools" could result in systemic risk and market fragmentation.

But he dismissed fears that Singapore's upcoming exchange-backed dark pool will undermine the stability of Hong Kong's market.

Over recent years, there has been increasing investor appetite for alternative trading platforms.

Dark pools, in which traders anonymously match large blocks of stock away from the central exchange, now account for more than 10 per cent of trading in the United States.

Although dark pool operations are still relatively small in Hong Kong, the head of Hong Kong's stock exchange warned against a lack of regulation and transparency.

Ronald Arculli said dark pool participants have information about trades that are not publicly available, creating an uneven playing field for retail investors, and fragmenting liquidity.

Mr Arculli, the chairman of Hong Kong Exchanges and Clearing, said: "Smaller companies in particular may suffer as high-frequency traders tend to prefer larger and more liquid shares.

"This could affect a company's development potential. Increasing market fragmentation not only effects effective price discovery, it also increases price volatility and may add to surveillance difficulties."

Recently, the Singapore Exchange announced it will launch Asia's first exchange-backed dark pool in 2010. It also aims to trade stocks listed in Australia, Japan and Hong Kong.

There have been concerns about what Singapore's dark pool will mean for Hong Kong. Some fear off-shore trading could make it difficult for Hong Kong to enforce regulations on insider trading and short-selling.

But Mr Arculli dismissed those fears. He said: "I think from what we see from the announcement that Singapore has made, I do not think they are out to, how do I say, undermine the stability of the Hong Kong market."

Mr Arculli said the Hong Kong exchange will continue to work with its international counterparts to monitor and strengthen the local financial system. - CNA/ms