Six Banks Face Lawsuits over Last Look

Six banks are facing a class action lawsuit over alleged
abusive practices involving the use of last look in their e-FX businesses.

The six, BNP Paribas (which has already
been fined by the New York Department of Financial Services
(DFS) for,
amongst other things, it’s broad use of last look), Citi, Credit Suisse,
Goldman Sachs, Morgan Stanley and Royal Bank of Scotland (RBS) face a claim
from former retail broker-dealer Alpari (US) in the hundreds of million of
dollars according to documents filed in a New York court this week.

The documents filed against each bank claim that they
routinely used last look to reject trades on a systematic basis, both on
proprietary channels and via third-party providers such as Currenex, FXall and
360T – all three of whom are named in the documents as granting or continuing
to grant the banks “last look privileges, including the ability to renege of
matched orders”.

The documents also claim that the banks used last look on
limit orders such as stop loss and take profit orders by waiting until the end
of the last look window to see whether the order could be executed to the
bank’s advantage.

In what may be an ominous sign for the defendants in the
case, the Complaints highlight how the use of last look was not disclosed to
customers – indeed only the Complaint against Citi notes that the bank formally
disclosed its use of last look in July 2016, the other five are alleged to have
never formally told their clients or published a disclosure document on their
website.

Although, Profit &
Loss
can find last look disclosures from Goldman Sachs and Credit Suisse in
addition to Citi, it cannot from BNP, Morgan Stanley or RBS. This may be of a
concern because the case brought against Barclays by the DFS over last look
centred on the bank’s lack of disclosure of its use of last look.

The Complaints argue, “If a buyside market order was matched to the order of another
buyside market participant on an ECN, the platform’s algorithms would execute
the matched trade immediately (in a matter of a few milliseconds). And because
trading on ECNs is typically anonymous to buy-side participants, a buy-side
participant would not know whether its counterparty was a liquidity provider
such as [one of the six banks], whether its order had been last-looked, or
whether its order had been rejected and subsequently executed at a less favourable
price.

“[The six
banks’] actual use of Last Look, including excessive hold times, also placed [them]
in a position to exploit the information [they] gleaned from customers’ orders
to trade on [their] own account with a significant advantage,” the Complaints continue.
“While Plaintiff and Class members are not yet in a position to confirm that [the
six 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.”

The Complaints
note they standard reason given by LPs for the use of last look – namely it
enables them to provide tighter pricing across a number of venues, but argues
this explanation of last look is “both pretextual and highly misleading”.

The
documents claim the explanation is pretextual because LPs have the technology
to withdraw an order from an ECN in several milliseconds. “They do not need
several hundred times that long to determine whether their order has been
filled on another platform,” the documents state. “The explanation was highly
misleading because it suggested that liquidity providers only used last look to
reject trades on orders that had already been filled elsewhere.”

In fact, the
Complaints, add, the banks “routinely reneged” on executable orders for reasons
other than the order being filled on another platform.

The
Complaints further claim that the banks, all of whom have the technology to “match
and execute nearly 100% of all trades in under five milliseconds”, programmed
an unnecessary delay of anywhere from several hundred milliseconds to several
seconds into their execution algorithms.

Colin_lambert@profit-loss.com

Twitter
@lamboPnL

Twitter
@Profit_and_Loss

Colin Lambert

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