Articles tagged by Last Look
In a release to accompany a new survey
taken by the firm, LMAX Exchange casts doubt on the ability of the FX Global
Code of Conduct to deliver industry reform in a timely fashion.
While noting that the first release ...
The eternally tricky subject of last look is being reviewed by the Committee for Professionalism (CFP) at ACI – The Financial Markets Association with a view to a potential re-write of guidelines published in ACI’s Model Code.
Sources familiar with the matter have told Profit & Loss that the CFP has been canvassing opinion over the appropriate use of last look in FX markets, which continues to split opinion in the industry with the aim of providing a more detailed set of guidelines.
Suggesting that FX liquidity takers pay to access precious foreign exchange liquidity was just the hot topic predicted if the level of correspondence was anything to go by, and while the consensus seemed to be, from the anecdotal evidence, that most people prefer the "both parties pay" model, this raises issues for me. Inevitably last look has a role to play, as pointed out by several correspondents, and if last look is used then yes, the LP should pay for the free option
It’s fairly obvious that, to use a buzzword of the moment, the FX market has operated asymmetrically for most of its history – banks have held sway and, until the advent of the non-bank high frequency market maker, had little competition. It took that challenge, allied to a few conduct issues, to redress the imbalance, but I am wondering if the pendulum – as happens so often in this business – is swinging too far the other way? And if it is swinging, what is driving it?
XTX Markets has made XTX-ray, a tool designed to replicate how sell-side market makers analyse spot FX liquidity, available to buy side market participants.
XTX-ray looks at a wide range of data, including fill ratios, the cost of rejected trades in USD, spreads and market impact, to reveal “hidden” costs embedded in firms’ spot FX execution with the aim of enabling them to more effectively analyse the liquidity they are accessing.
“XTX-ray makes state-of-the-art sell side execution analysis available to buy side firms, and counterparties will be able to evaluate the execution quality of their liquidity providers.
EBS BrokerTec will now be offering data via EBS Live Ultra at 5 millisecond intervals.
Last year, EBS BrokerTec launched EBS Live Ultra with two data publication intervals – 100ms and 20ms – with the intention that the faster service would be available to all market participants that meet certain trading criteria.
With the launch of the 5ms data feed in addition to these original two, the same participation criteria will apply for those wishing to access this, while the 20ms data feed will be available to all EBS Live Ultra customers.
So my sources tell me the “fatal flaw” draft of the Global Code of Conduct is now complete and that the work is nearing its completion – only of course it is not, for as was explicitly stated at the start of the effort, the Code will be a living breathing thing that will continue evolve over time.
Which is good because as I understand it, there are still contradictions within the text, not least around the subject of (deep breath) last look and pre-hedging.
If the feedback to Monday’s column is anything to go by, I can confirm that last look remains a highly emotive issue in the foreign exchange industry. It will help though, if not only some people “take a chill pill” to calm what is a highly emotive debate, but also if they read the Global Code properly and, more pertinently, understand that market making is not a charity and often the client’s own execution style can contribute to market impact.
LMAX Exchange has publicly committed to support the impending Global Code of Conduct in FX markets, however the operator has done so with a small caveat.
LMAX says it is “committed to serve as the industry’s best practice for transparency and fairness in FX execution and to lead, by example, the positive reforms aimed at restoring trust and integrity in the FX marketplace”.
It adds that it is from this stance that it is committing to the Code, “after we have been assured that the Code will be updated post- publication”.
Thankfully, and we accept no payment for this enormous service to the industry, at last week’s Forex Network London conference, former Citi FX head James Bindler and I solved the problem of last look.
Those of you that were there already know this, of course, and, equally clearly, it’s not my idea in any shape or form – I’m just jumping on the coat tails of other brighter people! That said, a solution, more importantly, a potentially workable solution, does exist.
Speaking at Profit & Loss’ Forex Network London, Paul Chappell, CIO of buy side firm C-View, explained how liquidity trends are being negatively impacted by the Fix scandal.
In a featured new segment introduced at Profit & Loss’ Forex Network London called BURSTS, Paul Chappell, CIO of buy side firm C-View, sought to explain liquidity trends in the FX market in the context of the recent scandals that have plagued the industry.
In this TED Talks-styled presentation, Chappell sought to address why there are, in his opinion, only a few genuine market makers left in the FX market that everyone else prices off, and why currency managers have seen their returns significantly reduced.
Although Dmitri Galinov, CEO of FastMatch, defends the controversial practice of last look in FX, he also claims that it will be eliminated within the next two years.
Explaining why last look has become such a hotly debated topic within the FX industry, Galinov explains that it is “a valuable tool” that enables liquidity providers to quote tighter prices to their customers.
The problem, as he puts it, is that “consumers want tighter prices but they don’t want last look”. For now, however, the two appear to be mutually exclusive, which is why this is a difficult issue for the industry to solve.
A new white paper released today by LMAX Exchange seeks to offer more in-depth analysis of the cost of trading in FX markets and calls for the creation of “robust, commonly-agreed” transaction cost analysis (TCA) metrics that compare and contrast the differences between executing on firm and last look liquidity.
The paper, TCA and Fair Execution: The Metrics that the FX Industry Must Use, proposes a blueprint for clients to better discern and compare the costs of trading across firm and last look venues and argues that existing TCA metrics fail to capture the nuances and value of firm liquidity.
The FX TCA analysis from LMAX Exchange should be welcomed for highlighting the absence of price improvement in too many TCA calculations, but there is still more work to be done and ground to be covered before the industry truly has a genuine TCA metric. What about market impact relating to the "parent" order? Do we differentiate between rejections for predatory traders and hedgers? After all, as any divorcee, if they are honest, will probably tell you, both parties play a role in the break up.
Guy Debelle, deputy governor of the Reserve Bank of Australia and chair of the FX Working Group responsible for producing the Global Code, discusses his hopes and ambitions for the much-awaited document with Colin Lambert.
Colin Lambert: May 25 sees the full Code released after two years of work, what is your message to the wider market that is seeing it in its entirety for the first time?
Guy Debelle: I would like to stress that this has very much been a public/private endeavour to move the FX market to a better place by providing guidance around what constitutes good practice.
Profit & Loss talks to David Puth, CEO of CLS and Chairman of the Market Participants Group (MPG), about how the FX Global Code of Conduct will work.
Profit & Loss: What was the process like to develop the Code from start to finish? Were there challenges in achieving consensus amongst so many different market participants?
David Puth: The development of the Code has generally been a constructive process. The committees involved in its creation are: the FX Working Group (FXWG), which is the central bank working group; the Market Participants Group (MPG), which is the group that I chair; and a number of industry groups, including regional FX committees.
There is one area of the Global Code of Conduct that continues to attract controversy, and, Colin Lambert says,
we all know what it is…
Although the assessment is a little harsh given the type of misconduct that led to the creation of the FX Global Code of Conduct, it is hard not to understand where the head of e-FX trading at a major bank in London is coming from when they note, “The Code had one job – give us clarity on last look – and it has failed miserably.”
There remains the odd voice still raising concerns about Principle 11 and its apparent endorsement of pre-hedging, however, Guy Debelle, chair of the FX Working Group that created the Code, stresses this Principle is really about the “demonstration effect”.
One of the problems with being associated with a subject for several years is that you can feel the issue and the debate is getting a little tired just when a lot of other people start getting involved. I feel this way about last look, but rather than bang on about it yet again I thought it might be worthwhile looking at how the industry got itself into this mess in the first place – and, possibly, how it can avert further damage.
BNP Paribas has been fined $350 million as part of a consent order entered into with the New York State Department of Financial Services (DFS) for “significant, long-term violations of New York banking law” in the bank’s global foreign-exchange business.
DFS says its investigation found the improper conduct at BNP included collusive activity by traders to manipulate FX prices and benchmark rates; executing fake trades to influence the exchange rates of emerging market currencies; and improperly sharing confidential customer information with traders at other large banks.
The hope that peer pressure will help drive adoption of the Global Code of Conduct's principles is fine, but what the industry also needs is real action to curb some practices that sit uncomfortably with some. Last look is one of them and while last year we had a spate of disclosures that highlighted how firms were hardening their stance on last look, this week has seen one bank - if I am reading this right - take a step further.
On the day that the second and final phase of the FX Global Code of Conduct was released, panellists at Forex Network New York debated whether it puts an unnecessary burden on buy side firms.
Philip Weisberg, a member of the Market Participants Group (MPG) that helped craft the Code, stated that it “puts an enormous responsibility on the buy side”.
Giving an example of this responsibility, he pointed to last look, a practice that some platforms do not allow and others allow to be implemented in a variety of ways. The platforms must disclose their last look policies, meaning that buy side firms need “to have some type of framework for evaluating the efficacy of a venue or liquidity provider choice or execution choice”, Weisberg explained.
The past year has seen me become increasingly irritated by platforms answering my call to help police bad behaviour in the Global Code era by saying either it’s not their responsibility or it’s an impossible request - so here's one area they can do something about. There are reasonable reasons for asymmetric price improvement data and - at a stretch - for asymmetric last look policies. But asymmetric response times? That's a whole different matter and something needs to be done now.
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 for, amongst other things, it’s broad use of last look), Citi, Credit Suisse, Goldman Sachs, Morgan Stanley and Royal Bank of Scotland 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.
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.
Whilst the publicity associated with the issue is unwelcome and untimely, last week’s revelation that a group of banks face a lawsuit over their use of (although it is probably more accurate to say ‘lack of disclosure of’) last look should have focused a few minds on the feedback process being run by the recently-formed Global FX Committee.
We need to be clear about this – if this lawsuit is settled or lost by the banks then more will inevitably follow.