XTX puts pressure on ‘last look’ in spot FX
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Foreign Exchange

XTX puts pressure on ‘last look’ in spot FX

FX market-maker XTX Markets is placing its bets on trade transparency, making a new tool available to the buy side that will, for the first time, enable them to calculate the cost of trades rejected by market-makers.

One of the reasons why transport network Uber has proved so successful is that users can track the journey a driver has taken on their smartphones and then rate that driver on the basis of speed, comfort, courtesy and any other relevant factors.

In other words, Uber has brought a level of transparency to private car hire that was never previously available.

This might be analogous to the foreign-exchange spot market, where new technology is shedding light on hidden costs and allowing buy-side firms to become much more discerning on how their trades are executed.

XTX Markets recently unveiled a liquidity analysis tool it believes will equip the buy side to confront hidden costs.

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Matt Clarke, XTX

“Making this analysis available to the buy side could have a big impact on market structure, because it will expose the potential cost of trades being rejected and empower firms to talk to their liquidity providers about execution strategy,” says Matt Clarke, a member of XTX’s distribution team for EMEA.

The tool, known as XTX-ray, will be offered without charge and could threaten the contentious practice of last look, whereby market-makers are given a final opportunity to reject orders against a quoted price. By calculating the cost of rejected trades and presenting that data to the buy side, XTX believes it can show the true cost of last look.

If successful, this type of analysis could be bad news for those liquidity providers that make regular use of last look, because it will show firms exactly how much money they are losing when a trade is rejected and they have to put in the order again.

While market-making banks have historically carried out this kind of analysis, buy-side firms have not previously had access to it.

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Jeremy Smart, XTX

“This presents yet another challenge to last look,” says Jeremy Smart, head of distribution at XTX Markets. “XTX-ray makes state-of-the-art sell-side execution analysis available to buy-side firms, and counterparties will be able to evaluate the execution quality of their liquidity providers. 

“The objective is to achieve a more transparent spot FX market, which is fair for all market participants.”

Future of last look

The future of last look in the forex market has been hotly debated ever since November 2015, when Barclays was fined $150 million by the New York State Department of Financial Services for using last look to automatically reject client orders that would be unprofitable for the bank.

However, some participants have expressed frustration that despite evident abuses, the practice has not yet been outlawed.

In a speech in London in November, Edwin Schooling Latter, head of markets policy at the UK Financial Conduct Authority, suggested “market discipline and customer choice” should determine if and where last look continues to exist.

The second and final chunk of the FX global code of conduct is due to be published by the Bank for International Settlements in May and will tackle last look, but some expect it will introduce disclosure requirements rather than curbing the practice.

David Mercer,
LMAX Exchange

“It appears the global code will allow last look and it appears that pre-trade hedging will be permissible, as long as they are disclosed to the client,” warns David Mercer, chief executive of LMAX Exchange. 

“Put simply, it is impossible for any client to understand all the disclosures from all the different market participants around this opaque practice.”

Many FX platforms continue to offer last look, but claim it is becoming less relevant, as they are updating their prices more frequently, and so it is harder for liquidity providers to justify holding on to orders to review them before execution.

EBS, for example, launched a new data product last year, dubbed EBS Live Ultra, which offers price updates at 20-millisecond or 100-millisecond intervals. Last week it announced it would provide data at five-millisecond intervals, making it the fastest live-streaming data feed available from a primary FX venue.

Since launch in September, the faster data feed has reduced the market’s reliance on last look, according to EBS, as there is less need to review client execution.

However, even with such developments, XTX and other participants believe there is still a need to better understand the hidden costs associated with last look.

Given the fragmented nature of the spot market, and the high dependence on aggregation tools to access liquidity, buy-side firms stand to benefit from any analysis that can give them greater insight into execution.

“If the industry retains last look, there is clearly a need to understand the cost more thoroughly, which is why we welcome a tool like this,” says Yaacov Heidingsfeld, president of FX aggregation technology provider TraderTools.

“An educated consumer will always be the best type of consumer. This analysis has the potential to show what happens when orders are not filled and what costs are incurred, which will allow market participants to fine-tune their execution strategies.”

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