The coming to an end of the Axiom Investment Advisors’ class action against Deutsche Bank over last look highlights a few issues to me – specifically around the raft of legal actions taking place, a work stream of the Global FX Committee and the level of appropriate disclosures.
My first thought on reading through the judge’s Decision was “I wonder what those banks that settled are thinking now?” Whether you like last look or not – I don’t as you probably all know too well – the fact is it is seen as a legitimate tool against predatory trading and toxic flow. What has been at issue in so many of these cases (including the NYDFS investigations) is its appropriate use.
Either way, Judge Schofield has found that Deutsche’s disclosures were appropriate and that it did not explicitly abuse last look with all members of the class action, which is no doubt a relief to the bank and those that work in its FX business. After all, if you want an example of how things can go horribly wrong when you roll over on these things just look at Barclays, which settled with both the NYDFS and Axiom, and into the bargain got itself embroiled in an unfair dismissal case that it lost, leading to it having to re-employ the “terminated” employee – which is awkward to say the least!
I have to say, I still prefer the idea that predatory traders are simply cut off from certain venues so that last look doesn’t have to be used, but there are too many grey areas and too few platforms really willing to chop some flow for better behaviour. So last look will continue to exist.
If that is the case it has to be appropriately controlled and monitored – and a positive for me in all this is that finally last look will exist in a more transparent environment – to a point.
I have to confess I feel that the current level of disclosures provided by LPs varies way too much; from the explicit, “we will not latency buffer”, through the explanatory “this is how we use last look”, to the downright vague (but to the point I suppose) “we use last look”. This could do with being tightened up and that may be one outcome of the Global FXC’s workstream on disclosures. It needs to be, because if there was one word I kept on picking up on in Judge Schofield’s Decision it was “ambiguous”, which was used liberally. That should serve as a warning shot for the industry and an impetus to the GFXC’s workstream on disclosures.
That said, I do understand that it is difficult to be too explicit around disclosures on last look because they vary per client and even within that client’s flow, but it strikes me that the counterparty list can be bucketed into several tiers and each given a specific disclosure.
For example – and I accept that the lawyers would have to tighten this up a little – one disclosure could be, “You are a sniping little [fill in detail here] so therefore we are going to last look the [life] out of you”. It’s honest, explanatory and leaves no one in any doubt as to where the LP stands, and if the “client” has an issue with it, then maybe they need to go elsewhere or change their method of execution? We certainly have the data available to fuel what was previously a tricky discussion.
A few sentences ago I used the phrase “to a point”, because I feel there is still a time bomb ticking around last look. Most of the top LPs have adequate disclosures – and I reiterate the word “adequate”, several could be stronger as I have noted – but the further down the ladder you go, the sparser disclosure documents become.
The GFXC is working on the cover and deal language, so I am not specifically talking about regional banks or retail…sorry institutional…brokers. More I am thinking of the smaller non-bank market makers who are actually liquidity recyclers, and who exist in a twilight world where they have a reasonable percentage of FX flow but adhere to no best practice document; feel they have no need to disclose anything because “we don’t have clients”; and see opportunities in acting in the last look window (I would go as far as to say their business model is often predicated upon it).
It is here that I think the industry needs to be really on top of its game and that means communication, honesty and transparency. If a counterparty has concerns about how a participant is acting they need to raise it with the participant themselves (cc senior management at both firms) or go through the platform concerned if it is anonymous.
That platform then has to raise the issue with the participant and, if they get nowhere, perhaps raise it with their prime broker. Silence cannot be an option here.
The problem is that at some stage self interest inevitably emerges – would a smaller platform, where a firm acting on the edges of rectitude is a reasonable chunk of the flow, consider cutting that firm off, or even having that awkward discussion about last look with them? Doubtful, but this is the obstacle we need to overcome at some stage if the industry is not to be rocked by further legal action and bad publicity which will inevitably reflect badly upon everyone, not just the one or two firms involved.
I suppose it is helpful that legal precedent has now been set around what the baseline disclosures need to look like, and that is, therefore, something for the industry to build upon and use when judging these twilight firms. It is also helpful, I think, that a bank has stared down one of these lawsuits, because I have little doubt these actions were seen as a source of easy money for firms looking to add a few percentage points of performance and, of course, law firms looking to take rather more than a few percentage points of an award.
It is noticeable to me that over the past three months there have been several occasions where a judge has tossed a complaint, albeit on a technicality in some cases, but more often because the case brought has been thin, riddled with holes and, frankly, lazily put together in anticipation of another bank rolling over and paying out. Perhaps with Deutsche staring down this action, we are at the end of that “free money” period, which to my mind will be good. I have no doubt there are some worthy legal actions out there that will hold the right people to account, but at least if the stream of cases slows to a trickle then the industry can get on with solving some of the more serous issues facing it as technology, regulation and market structure challenges mount.