JP Morgan has published a document on its
website explaining its trade matching and last look practices in its principal
FX business. In it, while JP Morgan stresses it applies last look symmetrically
and does not use latency buffers, Profit
& Loss understands the document merely explains existing practices at
the bank that are not new.
Upon receipt of a
trade request, the bank says it undertakes a two-step process in order to
determine whether to accept or reject the request. First, it assesses the
validity of the request from operational and credit risk management
perspectives (a validity check) and, second, it determines whether the trade may
be executed at the requested price (the price check, or last look).
For the validity
check, JP Morgan says when a trade request is received, it confirms that the
transactional details are appropriate from an operational perspective; and that
the legal entity submitting the request has sufficient available credit with JP Morgan
to enter into the transaction.
Following a successful
validity check, the bank says it compares the requested trade price against the
then-current JP Morgan client-specific price at which the bank is willing
to trade, to determine the extent of difference between the two. “JP Morgan
will reject the trade request if any such difference exceeds a client-specific,
pre-defined tolerance level set by JP Morgan (any such client-specific
tolerance level, (the price movement threshold”) and will accept the trade request
if any such difference is within the price movement threshold,” it states.
The bank says that
following the trade matching process, it “will endeavour to notify the client,
to the extent technologically feasible, as to whether the trade request has
been accepted or rejected”.
JP Morgan’s move is
the latest by the banking industry to raise transparency levels among its
collective client base through the publishing of documents explaining its
operating procedures. While they do open a window in the practices of the banks
in FX, some observers see the rash of disclosures as being driven by a desire
to establish a legal framework to protect the banks. The global Code of
Conduct, released last week in New York by the FX Working Group does not, in its
initial iteration, cover last look or trade matching – these areas, and others,
are to be covered in stage two, work on which begins in the coming weeks.
The increased focus on transparency of
actions around last look means the industry has to deal with what many believe
is the bundling of multiple themes – trade arbitration, latency buffering and
trade validation – which blur the issue. JP Morgan in its document says it uses last look, or “price check” as the bank
terms it, to protect itself “against latency inherent in electronic
communications or erroneous price formation generated by external systems.”
Last look is seen as vital by market makers
in helping them provide control – especially in fast moving markets, however
increased clarity around the use of latency buffering is to be welcomed.
Latency buffering is where a market maker deliberately introduces a degree of
latency to protect itself from faster traders or, more worryingly, to observe
the client behaviour in the context of the market move and “pre-hedge”
JP Morgan says in the document that while certain latencies and delays are
“inherent” in processing trade requests, the bank does not impose latency
buffers or other delays during matching in order to observe future price movements
as part of the last look process. The bank also stresses that it does not
pre-hedge trades whilst the matching process is being undertaken.
Just as asymmetric slippage is considered
poor practice in retail FX broking circles, so too is asymmetric last look,
when a market maker rejects trades that go against them but fulfil trades that
go in their favour. Whilst market sources tell Profit & Loss that the practice is not believed to be
widespread, there are inevitably whispered accusations suggesting some market
makers employ the practice.
JP Morgan states in the document that price movement thresholds may be variable by
client and are subject to change at any time. While the bank says it applies
last look symmetrically, wherein trade requests are rejected no matter what
direction the market has moved, it does add that it may allow price
improvements beyond the threshold for “certain of our clients”.