Three warm and fuzzy columns in a row…is an impossibility as we all know, so today – to cheers all round – we are back to being irritated about something.

I moderated an interesting panel session last week as Thomson Reuters and ACI Australia had an evening dedicated to the Global Code. I questioned the panel on responsibility to start the session, specifically the responsibility of the individual, service provider and customer. A sub-theme we
didn’t cover due to time constraints was the responsibility of intermediaries.

This is becoming something of a semi-regular theme in these columns because I am increasingly irritated by platforms answering my call to help police bad behaviour by saying either it’s not their responsibility or it’s an impossible request. The former is clearly a result of “listening to their customers”, several of whom are major market makers on the platform who don’t want anything to change and others are liquidity consumers with execution policies akin to a steamroller running downhill.

I do sometimes wonder if trading on certain platforms is similar to existing in a war zone – there are bad things happening all around, from all parties – but as far as the authorities, whoever they may be, are concerned, it’s all about winning, or to continue the analogy, making money.

The latter argument – it’s an impossible request – has some basis, however. I fully agree that when it comes to issues such as spoofing or some types of abuse of last look, a platform, on its own, cannot effectively police the behaviour of market participants.

So let’s look at something they can do something about.

I have been further investigating something I raised in this month’s First Tuesday Insight call and I have to say my findings bother me – a lot.

The question I was asking of platforms was simple, do you monitor LPs’ response times for both accepted and rejected trades? And if you do, what – if anything – do you do about asymmetricity?

We have become – somehow and I don’t know why – used to asymmetric last look in terms of the direction of market, but what about asymmetric response times? I haven’t made formal enquiries because I actually wanted to know what the people on the ground know and think about it, but
uniformly those platforms that support last look trading don’t seem to worry about LP responses being different for rejects and accepts – if they monitor the difference at all.

This is by no means a universal problem. I have seen data that suggest many LPs have very consistent response times, but for others it is a very different story.

I have been shown data that had one LP taking four times longer to reject a trade than accept it and other data from other LPs that had response times twice that for rejects over accepts. This is an average over a period of time I would stress, not cherry-picked one off instances.

I have asked the question, why does it take twice as long to reject a trade than accept it? What possible grounds could there be for this asymmetric approach? I could also have asked, why does it take longer to accept than reject a trade, however there appears to be a consensus that this is the result of the extra messaging around confirming, or affirming a trade, especially if a PB is involved.

On the question of longer rejects there was also a consensus of sorts – in that it was a total blank. Few in the platform space seem aware it is happening and even fewer appear to know what the appropriate response is. On one hand it could be argued that a longer reject response time means the LP is giving the client trade every opportunity to come back into court, but I think few, if any, of us, really believe that. Even if that was the reason there are too many reputational risks involved for it to be
worthwhile, because it would only need one miscreant to abuse the practice for the argument in favour to collapse.

There seems a clear reason for the longer reject response times, the LP(s) in question is using the client information to either hit the market elsewhere, or to execute their own hedge trade (especially in correlated markets) before accepting the trade. In other words, unless they can make money
out of the trade, they don’t want to know and they are explicitly using information from the client trade in the last look window.

That is not liquidity provision, it is not market making, and it is not client service; it is the foreign exchange industry’s equivalent of a Ponzi scheme. The numbers look good and you put your money (order) in, and nothing happens – the “LP” is making good money out of you and providing nothing but an illusion is return. The only difference between this and a Ponzi is that in FX you get your order back – often with a “NACK” message attached, but in this case I am not sure the abbreviation always means “not acknowledged”.

So yes, I understand that it can be difficult judge an LPs behaviour on a lone venue (I would still like to see people ask questions as to why the reject rates are so high, however – it’s either something wrong with the LP, customer or platform technology) but in this case it’s simple. Are the response times from my LPs symmetrical?

If they are, the end user is being treated as fairly as last look allows – if they are not, there’s a good chance that someone is playing games, and playing them in the shadows where most misconduct occurs.

I am genuinely interested to hear from anyone who can explain why asymmetric response times are not a reputational risk, but be aware you will be corresponding with a sceptic. Until or unless that happens though, this practice will continue to really bother me because it looks like fertile ground for repeated – even systematic – abuse.

Of course, it is at this time that I say, to those platforms that believe they cannot do much to help enforce the principals of the Global Code, that there is something they can do. Unfortunately, under the Code as it stands, using client information in the last look window is only “likely” inconsistent with best practice, so it would be wasted words. Things will change, however, and it would be nice if the
platforms could follow the path I wrote about on Thursday of participants getting in front of the Code.

It is about time that these platforms stop wringing their hands saying there is nothing they can do. If they don’t question or ban asymmetric response times there is something they can do – they can become good FX citizens and act on this issue NOW.

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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