Back in June 15, the Bank of England’s Fair and Effective Markets Review (FEMR), published its final report, setting out 21 recommendations to help restore trust in the wholesale Fixed Income, Currency and Commodity (FICC) markets. Among them was the need to ‘improve the controls and transparency’ around FX market practices, including ‘last look’,
The report stated that the new global code should address the practice of ‘last look’, which gives market makers a final opportunity to reject an order after a client commits to trade at a quoted price. As set out in Section 2.4.1, this practice developed out of the need to protect market makers against unanticipated market movements and predatory trading practices.
“the global code should also set out clearer standards on the use of last look, including whether it should remain an acceptable market practice”.
However, in its current form, it can potentially be abused by market makers, either by asymmetrically accepting or rejecting orders based on market moves after the order is placed, or by using the order to inform other trading activity prior to acceptance. In addition to the transparency measures discussed in Section 2.4.1 the global code should also set out clearer standards on the use of last look, including whether it should remain an acceptable market practice.
Back in March, the US Justice department and The SEC started looking into the practice of last look and asked Barclays for information about their last look practices on their BARX FX platform.
The disclosure states that Barclays:
Streams ‘indicative prices’ via BARX and third-party trading platforms…..and is not obligated to accept the trade request (at the given price), and may accept or reject the trade request at its sole discretion. A number of pre-trade controls are applied automatically by Barclays before a trade request is accepted or rejected, one of which is “last look.”
“Last look” is a term that is widely used across the electronic trading industry but lacks a consistent definition. At Barclays last look is used to:
Identify whether trade requests are made at prices that are within Barclays’ price tolerance for execution. This control may be applied immediately upon receipt of a submitted trade request or after a brief time delay. In each case, the refreshed price is compared to the trade request price. If the refreshed price has not moved in either direction from the trade request price by more than the defined price tolerance, Barclays will accept the trade request. If the refreshed price differs from the trade request price by more than the price tolerance, Barclays will reject the trade request.
The purpose of last look is primarily to protect against trading on stale prices due to latency, and against certain trading behaviour. For instance, activities such as aggregation, order splitting or previous quote selection may result in more rejected trade requests.
Therefore, the proportion of trade requests that are rejected due to last look will depend in part on the trading behaviour of the client and the platforms through which it trades.
Last look is also applied in the context of an “at-market” order placed via FIX – i.e., a trade request to trade not at a quoted price but at the prevailing Barclays’ client price. In this case, last look will compare the prices before and after the relevant time delay, and if they differ by more than the relevant price tolerance, the order will be executed at the refreshed price.
In January 15 in a response to the FEMR report, Deutsche Bank stated:
In our view, there should be a requirement for all participants to state clearly and transparently how they approach last look.
Unfortunately, I haven’t yet been able to find any similar disclose on Deutsche or any other major bank’s websites, although they may be accessible as part of the on-boarding disclaimer acceptances behind password protected trading platform logins.
Some customers actively request last look in order to receive closer bid/offer spreads and understand they will achieve a lower execution success rate, or as one participant put it, “The sophisticated professional traders who are actively requesting last look are the firms least in need of protection”.
The wider customer base may or may not be aware of Last Look as a concept and what the implementation means for their pricing and execution
On that point, in July I ran a poll asking buy and sell side firms, which of the following practices last look’, ‘time stamping’ and ‘internalisation’ highlighted in the FEMR report, were most open to abuse. The results showed a clear split between buy and sell side responses. Buy-side voters felt last look was most open to abuse, whereas sell side thought lack of time stamp was a more serious issue.
Finally, I made my thoughts felt on the practice here, and was immediately taken to task by a reader at the sharp end of electronic FX pricing, but it was great feedback, and came within minutes of my posting, showing that at someone reads my posts!