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Screenshot of a breaking news alert e-mail from Q2 2017
The past few weeks have been a time during which many FX industry participants have been considering execution models, and indeed the direction which many firms are taking, whether prime brokerage, liquidity provider or retail FX firm, is toward a combination of A and B book, in which orders can be sent directly to the live market for the majority of the time, but can be internalized during times of high volatility.
No last look execution has been notable by its relative absence across the entire industry with only a few advocates of this method having pioneered it, one of which being London’s multilateral trading facility for FX, LMAX Exchange. Last look execution allows liquidity providers to reject an order within a specified time period if the trade is regarded as unfavorable, even if a customer has hit the requested price, which some practitioners have deemed unfair as it allows dealers to gain a significant information advantage over its customers. It is one of the key areas of focus in the Fair and Effective Markets Review and has received a great deal of attention in recent weeks as responses to the consultation revealed market participants are strongly divided on the issue.
Today, two senior industry figures have provided their perspective on this, as follows:
Marshall Bailey, President of ACI – Financial Markets Association
“The reality is that customer preferences vary – and ‘last look’ can, at times, be an acceptable and effective form of execution. For example, some might prefer as tight a price as possible, accepting a potentially higher rejection rate through ‘last look,’ whilst others might prefer certainty of execution at a different price.
“The onus is on dealers employing ‘last look’ to be fully transparent and ensure customers are made aware that the practice is in use, the subsequent consequences are explained and that accurate records are kept on fill-and-reject ratios to demonstrate compliance. Having been fully apprised of the pros and cons of last look, customers should be in a position to decide to trade or not using “last look” pricing, in line with their own requirements and execution style.
“Whilst last look has evolved in a way that fosters narrow spreads, participants should take steps to ensure that provision of ‘last look’ liquidity does not create a false impression of market levels or depth. Under no circumstances should orders with ‘last look’ be placed for the purpose of price discovery and with no intention to trade, and use of electronic algorithms solely to accept trades that are favourable, and reject non-favourable deals when the criteria for assessing are equal, should be avoided completely.
“The ACI’s Model Code provides clear guidance on how ’last look’ practices should be used by liquidity providers and the information that must be provided to customers in order to maintain a transparent and fair operation.”
Dan Marcus, CEO of ParFX
“Last look is still used as a form of execution by some participants, but there seems to be a misconception that there is a significant time lag between when a trade was entered into a trading system and when it was executed thereby leading to routine abusive behaviors.
“As a primary venue for market participants, we decided not introduce last look as it is not appropriate in a market of natural interest and price discovery. The 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, and we have introduced a multitude of solutions to enable this to happen, such as randomized order entry and distribution of market data in parallel. While last look isn’t bad per se, it is contrary with this principle and potentially leaves the door open for disruptive trading practices to occur, such as the creation of a liquidity mirage or an unclear picture of market depth.
“However, we do not believe banning last look is the way forward. It still has a role to play in today’s currency markets, albeit increasingly limited, and can still work in some channels. It is important that customers are fully educated and informed about the trading venues and dealers that practice last look and make individual choices about whether it is appropriate for their trading needs. Ultimately, the market will evolve and decide what practices to carry forward – subject to any regulatory requirements – over the next decade and what to discard.”
Photograph courtesy of LMAX Exchange