- FastMatch will keep last look, but will monitor its use
- Bats Global Markets has given users less time to reject trades
Barclays Plc’s $150 million fine has inspired the chief of one foreign-exchange platform to change its rule book, a sign of how regulatory action is reshaping the world’s biggest market.
FastMatch Inc., run by former Credit Suisse Group AG director Dmitri Galinov, says it will more strictly monitor a controversial yet common practice known as “last look” following last month’s Barclays fine. Last look gives market makers a defense against faster, more sophisticated traders while enabling them to quote prices on a wider range of platforms. But it can be abused, allowing firms to trade or glean the intentions of other market participants virtually without risk to themselves.
The industry has debated last look for years. Some say it’s an obsolete leftover from the beginning of the digital era when the time lag between an order being entered at one bank and confirmed at another was long enough to expose the market maker to unpredictable movements in prices. As that time gap disappeared, the banks retained their ability to halt unfavorable currency trades.
New York’s Department of Financial Services said that Barclays abused last look, canceling regular market-making trades when they would have resulted in losses to the bank.
“It’s unfair to hold a customer order while determining whether the trade is profitable or not,” said FastMatch’s Chief Executive Officer Galinov. “If you’re a market maker and you quote a price, you have to be obliged to that price. Otherwise it’s basically a risk-free transaction.”
Other platforms are also examining their approach to last look. In July, Bats Global Markets Inc., which runs the Hotspot venue, cut the time market makers have available to change their mind to 100 milliseconds from 200 milliseconds. It also said market makers should accept at least 85 percent of such orders.
LMAX Exchange is critical of last look. The company published an anonymous survey in which 23 percent of institutional traders outside of banking said they weren’t even aware of the practice. LMAX says 450 firms including banks, asset managers and technology providers took part in the survey.
FastMatch isn’t banning last look, saying the practice allows market makers to quote better prices than they would otherwise be able to.
“My opinion is that last look is a valuable tool to keep,” Galinov said. “However, to use last-look functionality as not a protection but a money-making instrument where a liquidity provider just picks the winning trades is improper. If last look was to be completely eliminated, the clients will see wider spreads and much less liquidity.”
However, the foreign-exchange platform will measure its market makers’ use of last look and the trades that they reject. If a firm typically makes money when they fill the customer and would lose money on rejected trades, with statistical significance over a month period, FastMatch will ask the trader to review its practices. If the market maker fails to change its methods within a month, FastMatch says it will stop doing business with them.
Galinov said the new policy will have little impact on the platform, though “a couple” of traders were found to fail the new test.
In February, BlackRock Inc. said currency traders should lose the right to a last look before executing orders. The world’s biggest investor said the practice creates phantom liquidity, where prices that appear to be available suddenly disappear.
New York’s investigation into last look is separate from the group settlement announced in May between the Justice Department and five global banks, including Barclays, over manipulation of foreign currency exchange rates on the spot market. Banks have paid massive fines stemming from that scandal, leading them to overhaul their practices in currency markets.