31 October 2017
The ACI-UK’s Square Mile Debates are always something to look forward to. The trade association for the UK’s foreign exchange (FX) industry regularly hosts high-profile speakers and has earned plaudits from members and non-members alike for facilitating debate on the key issues and topics at the forefront of the industry.
October’s event was no exception; the FX Global Code, MiFID II and last look were amongst the topics discussed in front of an audience of several hundred market participants. But for many in the audience, the highlight of the evening was the debate on… you guessed it, last look!
I was honoured to be a member of the panel discussing last look alongside representatives from the bank, non-bank and asset management communities. Veteran ACI member Paul Chappell chaired the panel, and gauged our views on how our respective organisations intend to support and commit to the Code, before we dug our teeth into last look.
There was universal agreement that the Code was a positive development for the market. From a ParFX perspective, the Code aligns closely with our core principles of fairness, equality and transparency and we wholeheartedly support its doctrine. Similarly, other panellists declared their intention to commit, although they were at different stages of reviewing the specifics and how it would apply to their operations.
When it came to last look however, there was a divergence of opinions. We have never permitted the provision of last look liquidity on the ParFX platform; what you see is what you get – firm, irrefutable prices. However, this doesn’t mean last look in itself is bad, there are certain instances where its use is entirely legitimate. This includes rejection of a stale quote, the checking of credit, permission, risk and liquidity exposure as well as system and message integrity. That said, as technology has helped speed up checkpoints, we have seen last look time windows reduce.
This became apparent during the debate. One panellist confirmed his institution had reduced its holding time to 50 milliseconds, while another highlighted its ‘Zero Hold Time’ model for credit and risk management purposes, while referring to last look as a ‘tax on the industry’. Overall there was agreement amongst those present that holding times should reduce as price discovery in the market has become more transparent and market data has become faster.
However, the key question on everyone’s mind was: how is the information gained in the last look window utilised? What does a liquidity provider do with a counterparty’s trade information during the last look window?
It is clear there is scope for misconduct to occur if price information in the last look window is utilised to execute a trade, or if the liquidity provider always intended to reject the trade in order to learn more about a counterparty’s position in the market.
There was clear agreement that liquidity providers need to be transparent and make their policies relating to last look clear in their trading agreements. This way, counterparties can easily decide whether to trade with a liquidity provider that offers last look pricing, or not.
The discussion moved on to how trading should be policed. The panellists were asked whether platform providers should be responsible for policing trading behaviour relating to last look, but most of us agreed that this was neither practical nor realistic. A platform has hundreds of participants executing thousands of trades every day at increasingly fast speeds. It is simply impossible to police the trades and execution policies of every single participant. In addition, any reprimand would occur after the fact, in many ways defeating the purpose of addressing the issue to begin with.
So what is the best way of addressing this? Sometimes, people point to a particular client segment as the problem, but this is inaccurate and unfair. We believe it comes down to trading behaviour, and sharing detailed execution policies transparently, regardless of counterparty.
Take ParFX as an example – our top ten most active participants consist of eight banks and two buy-side firms. These two buy-side firms have very clear and simple policies relating to last look and using trade information during the last look window. They assume and transfer risk in a fair, equal and transparent manner, in line with the eight banks.
In contrast, a non-bank participant based in Chicago is open about cancelling trades during the last look window on other platforms, as per his execution policy and is not explicit about the information gained during the holding time. Interestingly this participant struggles on ParFX, because his trading policy simply does not align with our values and the features we have in place; you could argue he does not have an intention to trade against his or his client’s risk.
The ACI-UK’s event does not mark the end of the debate on last look. Earlier in the evening, one of the key architects behind the FX Global Code confirmed the Global FX Committee had received dozens of responses to the recent consultation on last look. This will be discussed during a meeting in November, and clearer guidance on the topic is likely be publicly available later this year.
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