I understand the debate around last look is complex and multi-dimensional, however I think we are seeing, in front of our very eyes, the ultimate in last look.
People often ask me why I am against last look in foreign exchange, and my answer is simple enough – I guess it is because I am old-fashioned in a sense and like to think that if someone makes a price, as long as they don’t (electronically or otherwise) say “off”, that price is good.
I understand that certain counterparties are predatory and, as such, the liquidity providers need a degree of protection against them, but this is a “consenting adults” market so it shouldn’t be taken too far. I would prefer LPs to merely decline to price certain counterparties unless they are in a last look environment, or, preferably, for the customers to accept that non-last look pricing may be slightly wider to adequately reflect the potential risk transfer.
Anyway, away from that, I would argue that what certain brokers are trying to do at the moment in changing prices on trades in the Swiss franc executed on 15 January – Saxobank and CMC Markst being the most public examples – is the epitome in last look. It’s just the time horizon that differs.
Whether it is a liquidity provider refusing a trade milliseconds after being hit (often because their cover price had gone), or trying to change a rate 13 days after the event – the principle is exactly the same.
This issue is also complex; however, all markets come with a “buyer beware” label attached and we shouldn’t make trading foreign exchange a “free option” for anyone, be they retail or the most sophisticated investors. That said, retail brokers like Saxo have a policy, quite rightly, to auto-close client positions when their margin is wiped out.
The problem in this case seems two-fold at those brokers trying to claw back money from customers. Firstly, they auto-stopped the clients at the margin wipe out level but were left holding the position as they had no “out”. This is a breakdown in their risk management process caused by an extreme market event – it also shows up the boasts made by several brokers of their “tier one liquidity streams”.
The second issue seems to be that for a short period of time these brokers’ systems continued to make prices even though the market was moving rapidly. This is also a failure of the risk management process, but one caused by complacency. Is it really a customer’s fault that they hit a price on a system? Or that the system triggered them out of their position and was left holding the baby?
That is, sadly, likely to be one for the law courts – in the meantime the foreign exchange market’s reputation will take another hit, but it’s unlikely to be as extreme as the reputational hit to these brokers, especially if this goes to extremes and people are sued for their assets because they’ve run out of cash. Sounds a bit far-fetched doesn’t it? Sadly, it may not be.
Either way, my argument is very much that this is the ultimate in last look, hence why I don’t like the practice. The adage in the foreign exchange market always used to be, “My word is my bond”; sadly in the modern era that can occasionally be translated into the more onerous, “My price is subject to change depending on whether I can make money out of you at this instant”.
In my humble opinion, at the extreme we are seeing with these brokers, that is reprehensible.
Colin_lambert@profit-loss.com Twitter Colin_lambert@profit-loss.com@lamboPnL