It’s about time, that the practice in FX of liquidity providers having a ‘last look’ before accepting a trade – a legacy from the old days of phone quoting, when the dealer took one ‘last look’ at pricing before accepting a trade – may at last be on its way out.
In the electronic platform era, last look, was a way to encourage banks to increase their liquidity provision and provide request for quote (RFQ) and executable streaming prices (ESP) where they may not know who was asking for the price, or who might hit their streaming prices.
In order to protect themselves from what some call toxic flows (here and here), the Liquidity Providers (LPs) were offered some degree of protection when quoting pricing by being given one ‘last look’ when someone attempts to deal on their quote, before deciding whether or not to accept the trade – ie they can decide if they like the trade before accepting it.
The problem with platforms that support last look is that clients are misled by the illusion of firm pricing, and in reality cannot rely on being able to trade on prices with certainty (unless of course they hit the ‘wrong side’, in which case the trade will certainly be accepted).
The practice actually distorts the true picture of available liquidity on that platform, which is then multiplied, either by the same LP quoting across multiple platforms, or other LPs using that quote as an input for their own electronic pricing – thus last look is closely linked to what is sometimes called the liquidity mirage, where prices appear to be firm, but like a mirage, when you reach them (or in this case try to trade on them), they disappear as the LP has their last look.
Next week (10th June) sees the release of the Fair and Effective Markets Review (FEMR), which was set up last year by the Bank of England and the Financial Conduct Authority to look into practices within the FICC markets and is expected to include recommendations into methods and practices that govern FX execution and will no doubt lead to new rules that govern how FX is executed.
It’s therefore interesting to see that two leading FX platforms have announced changes in their trading protocols to address the practice of last look. FXall and Hotspot FX (now owned by BATS Global Trading), have both taken the decision to introduce new trading protocols that will dramatically reduce the ability for LPs to have last look.
Hotspot has reduced the time a liquidity provider has to accept/reject a trade from 200ms to 100ms and increased the ratio of quotes to trades to 85%
Commenting on the changes, William Goodbody, head of FX at Hotspot, said,
“Last look is a widely used practice in the industry. To make it work, it needs a clear set of guidelines.”
Whilst Phil Weisberg, Global Head of FX at Thomson Reuters said,
“Following the new Matching rules we set last year that encouraged high standards of behavior in primary markets, the updated FXall operational procedures define the same rigorous standards for both our RFQ and Streaming Price trading protocols, where participants transact on a disclosed, relationship basis, as well as our Order Book platform, where participants trade anonymously using either firm or Provisory Liquidity.”
Some top-tier banks and electronic market makers that have invested in highly robust and efficient pricing engine and risk management capabilities do provide trading with no last look, and they benefit from increased deal flow.
One of the major reasons for the success of the new EBSDirect service is that it’s based on disclosed relationship pricing, and as such the LP will know who is on the other side of the price, and in general will be more likely to offer pricing without last look – ie firm dealable liquidity – which after all is what price takers want from a platform.
