‘Last Look’ to Remain Hot Topic in FX

Shanny Basar

ParFX, the wholesale spot foreign exchange electronic trading platform, said the practice of last look was one of the most topical issues of last year and will likely remain so in 2016.

“Last look liquidity” in the foreign exchange market gives price makers the right to reject or delay an order before it is filled and is problematic in electronic trading as it is unclear whether an order will get filled at a given price quote.

This month in a webinar hosted by the Washington-based Foreign Exchange Professionals Association legal experts said foreign exchange market makers need to review their existing practices around last look in order to protect themselves from regulatory investigations.

Last November Barclays Bank reached a $150m settlement with US regulators for allegedly abusing its last look practices in the foreign exchange market. The New York State Department of Financial Services alleged in a statement that Barclays evaluated and applied its last look rejection protocols almost entirely in reference to the profit or loss the trade would bring to the bank based on price movements during the hold period.

Dan Marcus, chief executive, and Roger Rutherford, chief operating officer of ParFX, said in an email to Markets Media: “Last look was one of the most topical issues of last year and will likely remain a theme in 2016. The FXPA’s advice to market makers on the use of last look aligns closely with recommendations outlined in last year’s Fair and Effective Markets Review.”

Last June the Bank of England released a report on its Fair and Effective Markets Review which made 21 recommendations to help restore trust in the wholesale fixed Income, currency and commodity markets.

BlackRock had said in response to the Bank of England’s review that the use of last look is problematic. The fund manager said: “Just as in the equity market, where centralised venues represent firm interest rather than mere indications of interest, our preference in the FX market would be to a view on the liquidity in which we can deal, even if this comes at a higher cost compared to the ‘phantom liquidity’, which can be removed at short notice. Moving away from indications of interest to streaming firm prices would be fully consistent, we believe, with outcomes that are both fairer and more effective.”

ParFX does not offer last look functionality. “The quality of execution and stability and firmness of prices that participants see on ParFX, and the ability to execute on these prices, is one of the platform’s primary principles,”said the firm.

The electronic foreign exchange platform, designed by interdealer broker Tradition, was launched in 2013 with 14 banks, including Citi and JP Morgan, amongst its founding members.

Last October LMAX Exchange, a UK-based MTF for foreign exchange, surveyed 450 institutional market participants for a report, “Restoring trust in the global FX markets. In the survey 80% of respondents said they were concerned about the lack of transparency in FX. In addition 85% of those aware of last look liquidity  said this was the market practice most open to abuse.

However, ParFX does not believe that last look should be banned.

“Flexibility in execution is key in differing market conditions with different participants and last look still has a role to play in today’s currency markets, particularly as regards bilateral trading relationships,” added ParFX. “Ultimately – subject to any regulatory requirements – the market will evolve and decide what practices to carry forward subject to any regulatory requirements.”

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