Whilst the publicity associated with the issue is unwelcome
and untimely, last week’s revelation that a group of banks face a lawsuit over
their use of (although it is probably more accurate to say ‘lack of disclosure
of’) last look should have focused a few minds on the feedback process being
run by the recently-formed Global FX Committee.
We need to be clear about this – if this lawsuit is settled
or lost by the banks then more will inevitably follow. Unlike the benchmark
reform and increased surveillance and rules around information sharing that
came out of the chat room scandal, last look has not been resolved – and I am not talking about whether it should be
banned or not, I am talking the number of liquidity providers that do not
disclose their use of the practice.
Talking to people at some of the firms without disclosures
their argument is “we don’t have customers so we don’t need to disclose” or “we
are dealing on a public platform with rules that state last look is employed”.
The second argument may be valid but the first? I am less
sure. We have spoken for many years about the blurred lines between retail and
institutional but long ago we were also discussing the blurred lines between
customers and providers. The modern foreign exchange market allows a “customer”
to become a liquidity provider by posting an order – perhaps the interesting
question, given the events of last week, should be “does posting an interest
revoke their right to be viewed as a customer?”
The changing market structure has seen many instances where
a firm plays both sides of the street – they are a principle, posting interest
to the market as such, but they also demand to be treated as a customer by
It is for the individual banks to decide how a firm should
be treated but going back to last week’s class action, is one of the areas
needing to be investigated the role of Alpari in FX markets? Was the firm truly
a customer? Like many other retail aggregators the flow could be pretty toxic
and I have no doubt the firm also played as a principal on certain platforms –
does this place it in the camp that is bucketed by those firms without last look
disclosures as peers? If it does, and their argument holds water then surely
there was no need for a disclosure?
These are legal semantics of course and, yet again, the only
people likely to get rich out of the foreign exchange market are the lawyers.
This is a good time, however, to consider providing feedback to the GFXC.
Unlike this column, the GFXC is seeking answers to only two
questions when it comes to last look, but if as many people as possible can
answer them the industry has a great opportunity to demonstrate it is doing
something about a real problem – much as it did with benchmarks.
The questions are:
The Code states that “During the last look window,
trading activity that utilises the information from the Client’s trade request,
including any related hedging activity, is likely inconsistent with good market
practice because it may signal to other Market Participants the Client’s
trading intent, skewing market prices against the Client, which (1) is not
likely to benefit the Client…” Do you agree or disagree? Are there
specific situations where this trading activity benefits the Client? In those
situations is such trading activity related to the validity or price checks
that the Code states as the purpose for last look? Please provide reasons for
The second question is based upon the response to Question
1. Do you consider that the language set out in the Code on this activity
should be modified (for example, should it be strengthened further or provide
further detail as to what may or may not constitute good practice)? Please
My language in Friday’s editorial on the lawsuit was pretty
strong, but then I feel pretty strongly about this issue (having banged on
about it for the best part of this decade it can hardly be any other way!). I
also think that all participants
should consider the issue of last look because it is the next ticking time bomb
under the FX market.
The banks may look at this issue and decide it’s only a
couple of hundred million dollars to settle but I have to reiterate this will
remain an open issue. Without a clear structure and disclosures other firms
will be tempted to go the legal route to deal with last look – it cannot be
swept under the carpet by paying a few fines.
My argument as to why we need – as an industry – to deal
with last look now is pretty simple really.
I doubt there is a single participant out there that has not
dealt on a last look price and very few that have never been rejected on a
price move. That makes for a pretty long and sustainable pipeline of litigation
if you’re an LP that has both used – and not disclosed – the practice.