Push for Reforms. Should Regulators abolish Last-Look in FX?
We do not believe that Last-Look needs to be abolished. Educating customers and a sound Trading Cost Analysis will go much further than any abolishment. Impact on liquidity and the cost of execution would be substantial.
The HFT community, Exchanges, and Platforms are pushing hard to move the FX Business on expensive venues. Further explanation of the “Last-Look issue” can be found on our post FX Aggregation and Execution. Liquidity Mirage, Last Look, HFT, and Latency.
A leading Multilateral Trading Facility (MTF), LMAX Exchange (LMAX), which provides foreign exchange (FX) trading to retail and institutional clients, today made an announcement calling on the financial regulators in the UK to take the lead on global reforms for the FX industry.
LMAX said that the UK financial regulators should show leadership to help reach objectives set out by FEMR to improve FX market transparency – as previously set out by the Governor of the BoE and the Chancellor of the Exchequer.
In a parallel release, LMAX published a report today titled ‘The road to FX reformation: Restoring trust – a second look at market progress,’ surveying some market participants on prevailing issues within FX markets globally, including last-look, and the recent Global Code of Conduct.
Among other findings related to the FX market, the majority of respondents surveyed in the report by LMAX showed a preference against trading on FX market prices that were subject to last-look execution, as can be seen in a table below excerpted from the report.
Regulatory inertia in FX
LMAX wrote that the report found how FX market participants do not believe much has changed in the last two years and cited “regulatory inertia”while questioning the ease of implementing the recently announced voluntary code of conduct.
The update called on the BoE and HM Treasury to utilize the FEMR process to steer a regulatory agenda for global FX markets by introducing new industry standards to show a commitment to eliminating market-abuse from known practices surrounding trade-execution.
Last-look in focus
LMAX has argued against last-look on some occasions including at industry events co-organized by Finance Magnates. Its latest report now shows how participants are increasingly moving away from this practice of execution that allows dealers to decide at the very last moment whether or not to execute a trade – in the event that the price moved either favorably or unfavorably to the dealer.
David Mercer, CEO of LMAX Exchange, commented in an official statement regarding the survey and call to action: “It is clear that restoring trust is the biggest challenge that the global FX industry faces. Fines for market abuse have continued since we last provided an in-depth survey of the market and the Global Code of Conduct has been launched to a lukewarm reception and only addresses the ‘voice market,’ just 30% of the industry. The easy questions have been answered, with the hard ones yet to come.”
Mr. Mercer added: “As a result, we are calling on the UK regulators to show global leadership in current uncertain times and abolish ‘Last Look’ among other practices that are open to abuse. This requires a clear timeline and action plan, significant revision to the composition of the working groups and a total focus on the ways that technology can make the global FX industry work more efficiently.”
Mr. Mercer concluded regarding the report: “These findings should concern those seeking to reform the FX market. FX can only thrive as a liquid, global and essential market that it should be if it engenders trust among all market participants.”
“This research shows that the market still has a long way to go to win back trust and there needs to be greater focus and urgency to address the major issues at play. This is being brought into even sharper focus with the exceptional global uncertainty following the UK’s Leave vote in the EU Referendum.”