Stephonomics: FX Market Analysis: ‘Last Look or Do Over’

In this blog analysis, Stephen Simonis takes a look at what is being debating in regards to ‘last look’ policies

The US Justice Department and the Securities and Exchange Commission (SEC) are investigating banks over a procedure called ‘last look’ which allows banks to re-quote orders at the expense of their clients. The Justice Department prosecutors and SEC officials have requested information regarding the banks’ electronic trading platforms, specifically a program allowing the banks’ traders to take a second look at an order before executing it. Investigators are looking into whether banks have misused the ‘last look’ option to make sure they profit at the expense of their customers.

The Bank of England’s Fair and Effective Markets Review said that it favored ‘effective and proportionate framework of post trade transparency’. They also expressed concerns that the ‘last look’ option also allowed banks a chance to hold an asset manager’s trade for a duration of time –thus giving the bank a chance to front-run trades.

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The SEC is said to be looking into whether ‘last look’ practices violates American disclosure laws

Others suggest that ‘last look’ should only be used to mitigate technological anomalies and latencies when showing firm prices to customers. The SEC is also said to be looking into whether this practice violates American disclosure laws.

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As you can see, ‘last look’ remains a divisive issue in the foreign exchange markets. Some traders say it is a perfectly legal tactic, while some clients feel they are being ripped off by the ‘last look’ process.

My take, you ask? Well you had to know it was coming! Here are my thoughts…

I can see why the subject is such an issue and divides the banks and ECNs from its clients; however, let’s step back a second and remember that the banks began putting ECNs in place in order to save money and cut head count. ECNs are a large part of why many traders are now seeking employment in other marketplaces; some have gone so far as to express their thoughts through opinionated articles on the subject…yes, like this one. One can also argue that ECNs basically eliminated an entire industry of voice brokers.

The systems in place mindlessly execute trades every second of every minute all day, every day. They work fine in times of low volatility, and the banks make a load of money. I have no problem with this; they are supposed to make money. However, when ‘market anomalies’ occur, they want the option to call a large DO OVER! Really? What am I back in middle school? ‘Okay, your deal is done. No wait…. DO OVER! We lost money on that rate; we’re going to have to change it!’ Seems totally against any FX or trading principles that are supposed to exist. It seems unfair to me that the banks’ ECNs can execute deals that favor them endlessly and then when the one off trade hits the books they want the right to be able to adjust the rate. Talk about wanting your cake and eating it too!

In the end, though, as much as I believe that ‘last look’ is an absurd practice that violates basic foreign exchange principles, I think the government agencies do not necessarily need to get involved if the bank is up front about having a ‘last look’ policy in place. If you are a client and know that an institution has this policy in place, and you still choose to leave orders with them, well, that’s your decision.

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