Editorial: Are Last Look’s Chickens Coming Home to Roost?

Few can be
surprised that such an increasingly emotive issue such as last look has led to
a lawsuit. As someone who has disliked the practice for more than a decade and
written about the risks associated with the regular rejecting of trades for
more than seven years this class action lawsuit is not surprising – but I
cannot help avoid the feeling that this is both someone trying it on, while at
the same time it is the worst case scenario for the defendants.

The reason
I see this case as someone chancing their arm is because the claims are being
made without access to order logs or the algorithmic logic behind price making
and matching at the banks.

The
Complaints also hint that the banks may have used client information in the
last look window but again they offer no direct evidence – rather it is
inferred. “[The bank’s] actual use of last look, including its excessive hold
times, also placed it in a position to exploit the information it gleaned from
customers’ orders to trade on [its] own account with a significant advantage,”
the claims state. “While Plaintiff and Class members are not yet in a position
to confirm that [the banks] necessarily did so with any frequency, the profits
it could have earned by doing so are such that [they] was at least aware of the
possibility.”

In other
words, we think this is wrong, we are pretty sure something is going on, but
all we can do is throw some accusations around and hope one of them hits home.

As I
mentioned at the top, I really don’t like last look but while I always thought
it immoral it has never been, to the best of my understanding; illegal. What is
a problem, as noted in our report today on the lawsuits, is the lack of
disclosure of last look (I would also be concerned about the opportunity for
plaintiffs to claim using information in the window – if it can be proven – is quasi front running.)

The reason
I feel this is the worst case scenario for the banks is the plantiff is someone
who has nothing to lose. Alpari exited the US when it decided it didn’t want to
conform with the local regulations covering FX retail brokers so whereas a fund
manager could, if the case leads to a change in the FX market structure,
suddenly find their FX hedging programme much more expensive, Alpari (US)
doesn’t exist – it won’t care about the consequences.

Something
that did tweak my interest in the Complaints surrounds a recent
theme of mine – the platforms.

The lawsuit
claims that granting concessions such as allowing them to use last look is
“essential to any start-up ECN’s economic survival”. They further claim that,
“ECN’s were hostages to [the bank’s] demands”.

Nonsense.

Thus far, eight
LPs have faced a claim relating to last look abuse but read any platform’s
publicity material and you will see something like “deep liquidity with more
than a hundred liquidity providers”.

I would
also argue that some platforms have shown it is not essential to have last look
to attract LPs. Forget for a moment that Matching and EBS Market remain the two
platforms of record, LMAX Exchange and ParFX have both built businesses without
resorting to supporting last look.

I want to
stress that the platforms are in no way behaving illegally and they are only
mentioned in the Complaints as examples of how the banks allegedly abused last
look on public as well as private venues, but surely, as I have been arguing
for more than a year now, they are implicitly supporting the practice? The
argument that they have been coerced into supporting last look seems specious
to me, especially given the rise of non-bank liquidity over the past five or
more years.

These
latest cases only serve to reinforce my belief that the industry needs to
better police last look if cases like these are not going to drag on for years
to come (and more will be lodged – if you used last look in the past there will be a customer out there looking to
score some easy money).

The Global
Code sadly, in my view, fudged the issue, but the Global FXC has, thankfully,
made the removal or otherwise of the word “likely” from Principle 17 one of its
first priorities. To make it easier for everybody to have their say in this
debate, here
is the request for feedback and you need to send your views to
lastlookfeedback@globalfxc.org. No excuse!

It’s hard to escape the feeling that what started as a
genuine attempt to protect from latency costing LPs millions of dollars has, through
natural evolution, become a ticking time bomb for yet more legal cases and,
possibly, pay outs.

Hopefully this will be a wake up call to the industry as
well, for while on the issue of conduct it has largely put its house in order,
on last look it hasn’t. Not only does the Global Code lack clarity but too many
LPs still fail to have last look disclosures on their sites and platforms still
decline to monitor rejection rates and, as I recently raised, asymmetric
response times.

Last look remains a potential cancer at the heart of the FX
industry and while it may be impossible to totally remove, it should at the
very least be subject to measures that control it much more than currently
exist.

Colin_lambert@profit-loss.com

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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