XTX Markets, the leading non-bank liquidity provider in the FX industry, is making a big step to further boost the company’s position among major competing banks. The firm is committing to a new last look model it calls ‘Zero Hold Time’.
Typically liquidity providers have the ability to apply a last minute (or rather millisecond) check to any order they are processing in order to ascertain whether they should accept or reject it. This practice has become known in the industry as last look and is a central topic of discussion by FX market participants and the FX Global Code of Conduct.
The co-CEO of XTX Markets, Zar Amrolia, explained: “With recent improvements in technology and market data, we believe that it is hard to justify the use of a latency buffer in pricing. All direct counterparties of XTX Markets now enter into transactions either on a ‘Non Last Look’ or a ‘Zero Hold Time’ basis with no latency buffer.”
“We are encouraged that other top tier liquidity providers are working on a similar approach and that there are ECNs working on moving the price check away from LPs onto neutral venues (i.e ‘hosting’ the last look function). We hope the combination of adherence to the Global FX Code and the ZHT practices of market leaders will reduce the impact of the problematic practices sometimes associated with Last Look and lead to fairer and more transparent markets for all participants,” Amrolia elaborated.
Liquidity providers are using last look as a risk control mechanism to verify the trade and the execution price level of a given order. The practice has been advocated by industry participants that support it to be needed in order to eliminate the risks associated with latency.
Modern Technology Eliminates Latency Buffer Need
Liqudity providers have used a ‘latency buffer’ that holds the trade request for a brief period of time before the price check is performed. During the period of price checking, which is called a ‘holding window’, LPs are applying their price check mechanisms to verify the levels with real-time market prices. This step contains the risk of the LP getting hit by a stale quote.
XTX Markets is taking the major step of eliminating the holding window, explaining that nowadays market data is updated much more frequently than ever before. For some currency pairs, after the application of the 100 millisecond holding window, the LP could receive up to 20 primary market price updates before applying the price check.
The move by XTX Markets may be the first of many to follow. The publication of the FX Global Code of Conduct is already yielding results to the marketplace. The structural changes that were implemented in the final version of the code are already likely to change the market materially.
Commenting in an official announcement, XTX Markets said: “As a major participant of the wholesale FX market, we intend to adhere to the Code by evolving our own institutions’ FX practices to be consistent with the principles in the Code. We are also committed to promoting the Code to our counterparties in support of the integrity and effectiveness of the FX market.”
The principal cited for the change is Principle 17, that mandates transparency when employing last look.