Photographer: Andrew Harrer/Bloomberg

Vanguard Says Currency Markets Fall Short in Curbing ‘Last Look’

  • Officials and market participants seek feedback on practice
  • Trading during last-look window is “lightning rod”: CLS’s Puth

Andy Maack’s vision of a fair currency market doesn’t include “last look,” a controversial practice that allows dealers to back out of losing trades.

Maack’s view matters because he’s head of foreign-exchange trading at the world’s largest mutual-fund company, Vanguard Group Inc., which manages about $4 trillion. While the use of last look has diminished in recent months in the $5.1-trillion-a-day currency market, it still persists, he said.

“I’d ultimately like to see an FX world without last look,” Maack said in a phone interview from Malvern, Pennsylvania. “The more liquid and more transparent a market can be, the better it is for everybody, the more fair it is for everybody.”

A newly formed global foreign-exchange committee, comprised of central bankers and industry members, is seeking feedback on trading practices around last look as part of Thursday’s roll out of the FX Global Code, a set of standards aimed at stamping out misconduct after a rate-rigging scandal led to billions of dollars of fines for banks in the past few years.

“It’s important to make sure we’re getting the widest range of views,” Simon Potter, head of the markets group at the Federal Reserve Bank of New York, said at a press conference in London. “We encourage all market participants who have an interest in this to send us feedback.”

Since last year, market makers have made an effort to more clearly explain their use of last look, Maack said. Dealers are also increasingly applying the practice on a symmetric basis, he said. That means they’re rejecting trades if prices move by a certain threshold in either direction, no matter which side benefits from the cancellation.

‘Lightning Rod’

“Trading during the last look window has elicited much debate and was a lightning rod for public speculation on our mission,” said David Puth, chief executive officer of CLS Group Holdings AG, who led a two-year effort by market participants to hammer out the new industry standards.

“When used properly, it serves an important purpose and facilitates smooth execution,” Puth said. “If abused, it will harm the market and its participants.”

Critics say the option to back out of trades can be misused, allowing some firms to glean the intentions of other participants or halt unprofitable transactions. Proponents say last look enables dealers to quote prices on a wider range of platforms and defend themselves against faster, more sophisticated traders. Barclays Plc agreed to pay $150 million in 2015 for misconduct relating to the practice.

Trading that uses information from clients’ trade requests, including hedging during the so-called last look window, is “likely inconsistent with good market practice,” according to the FX Global Code.

“The bar is quite high” for trading in that window, Potter said.

Clients will determine the fate of the convention. They’ll either choose trading venues and counterparties that offer firm prices, or accept the provisional liquidity that the practice entails, said Javier Paz, a senior analyst at consultancy Aite Group.

Stubborn Tradition

“Last look just doesn’t go away,” said Michael Melvin, a professor at the Rady School of Management at the University of California San Diego and a former managing director at BlackRock Inc. “It’s certainly contentious and it’s certainly controversial.”

Some trading venues don’t allow it, including Curex Group, LMAX Exchange and ParFX, which was created by Cie. Financiere Tradition SA.

“LMAX Exchange will continue to advocate for the eradication of last look,” said David Mercer, its chief executive officer in London. While the FX Global Code is a move toward restoring trust in the industry, “it does not go far enough.”

Asset managers including BlackRock and T. Rowe Price Group Inc. have also expressed concern about last look.

While such firms are among the banks’ biggest customers, and often get the best exchange rates and premium service, they’re also sensitive to small price fluctuations that can increase costs over a large number of transactions, said Kevin McPartland, head of research for market structure and technology at Greenwich Associates.

“It’s not just about the spreads that we get, but it’s also about the quality of the market that we participate in,” Vanguard’s Maack said Monday.

Sjoerd Rietberg, co-CEO of Flow Traders, put it more bluntly.

“Last look is ridiculous,” he said in an interview last month.

When the Amsterdam-based algorithmic trader begins making markets in foreign exchange later this year, it won’t employ the practice.

— With assistance by Will Hadfield

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