Part fills were once seen as a relatively benign and rare feature of the FX market when the latter was less dominated by speed and latency reduction, and liquidity was more plentiful because the majority of deals got filled at full price.
However, as technology has advanced and liquidity has been squeezed, clients who need to get an order done within a specific time frame find themselves at an increasing disadvantage.
An order for a client who is under pressure to fulfil a £25 million order for a fund manager, for example, might see a price for the full amount at the top of the book. But by the time that order hits the market and signals of the trade are being picked up, the price might have dissipated, creating part order fills at a different set of prices, observes James Watson, managing director at ADS Securities UK.
Therefore, the client in this example ends up with potentially three or four tickets to do the deal, all at different prices.
The problem is that this component of the market infrastructure can potentially be used against the client's interest, says New Change FX (NCFX) CEO Andy Woolmer, adding: “Inherent in accepting part fills is the transfer of information to the counterpart of the trade.
"Malicious use of this information – which is not a given universally – means that the market can easily be pushed against the client by users with faster technology, pushing up execution costs significantly.”
According to Woolmer, the challenge for users is that they have limited choices and face the cost of information leakage either way.
“Using an aggregated platform is often presented as a best execution panacea, but the platform itself may be the root of the problem," he says. "Equally, asking a single provider for a risk-transfer price will inherently include the cost of the single provider hedging risk through aggregated platforms.”
Certain platforms do not allow information to be transferred adversely and certain market-makers now exclude client-identification information from their price formation algos and these access tools must be carefully identified by market users, adds Woolmer.
Market participants have previously observed that last-look pricing offers the hope – but not the guarantee – of a better execution fill rate, often compressing the top of book quote through aggregation and smaller deal sizes. Large trades are susceptible to considerable market impact if liquidity is low and volatility is high.
Last look is the practice used by banks to pull a price from a platform after a customer has placed an order, introduced as a defensive measure to deal with toxic flows that outwit traders.
Dan Marcus, ParFX
While last look isn’t bad per se, it is contrary to the principle of stable and firm pricing, and potentially leaves the door open for disruptive trading practices – such as the creation of a liquidity mirage or an unclear picture of market depth – to occur, says ParFX CEO Dan Marcus.
“However, we do not believe banning last look is the way forward,” he continues. “Flexibility in execution is key in differing market conditions with different participants and last look still has a role to play in today’s currency markets.”
When asked to what extent part fills could be impacted by reforms to last look, NCFX's Woolmer observes this is really a question about the abuse of last look by market makers using partial fills to fish for information.
“The key to all this is monitoring arrival times and fill times, creating millisecond TWAPs [time-weighted average prices] in order to assess costs accurately and then choosing not to use platforms where latency and adverse trading patterns are identifiable,” he says. “These patterns become obvious when using transaction cost analysis data not derived from a single platform.”
Of course, there is a case to be made for the view it is the prerogative of clients to choose to use market makers with less than perfect fill ratios.
There is little benefit to clients from going to bank market makers rather than non-bank market makers since neither – and especially the latter – are allowed to carry substantial risk overnight, adds Watson at ADS Securities.
“There are clients who are happy to go for what we would call average pricing,” he concludes. “Market participants generally know the depth of liquidity in the market at any given time and are aware that prices change almost instantly, depending on who is on their liquidity panel.
"Matchmaking and fine tuning of the liquidity panel enables as much of a client’s order as possible to be done at the initial price.”