Survey Suggests More Clarity Needed on Last Look
Posted by Colin Lambert. Last updated: July 9, 2021
The results of a new survey conducted by XTX Markets finds that not only are market participants unhappy with the practice of additional hold time (AHT), or latency buffering, as part of the last look process, they also feel that more clarity is needed. Significantly ahead of the Global Foreign Exchange Committee publishing a guidance paper on last look, the survey also reveals respondents believe that the FX Global Code should be more prescriptive in its guidance.
The survey was conducted following the release of a paper earlier this year by XTX which took aim at the practice of additional hold times in last look, and argued that it was an “invisible tax” and a “distortion” of their true execution costs. XTX says it received 103 responses from 101 market participants.
Probably the highlight of the results is that in excess of 90% of respondents agree with the statement that the purpose of LPs using last look should be to manage credit risk and to check current market price validity only. Almost 70% disagreed with the use of AHT for avoiding adverse selection and managing market impact, although the need for increased messaging on this topic can be found in around 8% responding “don’t know”.
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It should not be a surprise that so many clients, when they think about it, are unhappy with additional hold times. Some argue that AHTs give more time for the trade to be accepted, but that has largely been debunked as a myth – if a trade is directional the situation is unlikely to change in 200 milliseconds.
In the context of the modern FX market, last look provides protection to those providing dozens of streams, however its use has always been mired in controversy. Whilst it is clear that the use of trade information in the last look window is bad practice, many LPs believe that AHTs are acceptable, not least to help deal with “toxic” flow. Others follow what could be viewed as the more traditional approach of widening spreads for this flow.
Rarely does the GFXC discuss the issue of last look and the various views of its practice without using the word “complex”, and one of the tasks of the Last Look Working Group has been to simplify the issue. An “easy win” for the Group would be to clarify the language around AHTs, as demanded by the majority in the XTX Markets’ survey and there may be, The Full FX understands, good news.
Industry sources say that the Working Group has, in its proposed guidance paper, recommended adding a phrase that specifically says last look is to be used for price and validity check only – and not for any other purpose. It remains to be seen how assertive the GFXC is in separating price, risk and credit checks from AHTs, but there could be, the sources say, a shift in that direction.
If the GFXC does make explicitly clear – it may believe it has already done so but clearly it has not been specific enough for some participants – that AHTs are anathema, then, finally, the FX industry may take a huge step forward is solving one of its more persistent areas of controversy.
Such a move would provide more robust and helpful guidance for clients, better protection for the broader industry, and allow LPs to demonstrate the quality of their service on a level playing field.
Although there is a clear majority against the practice, there is more confusion when it comes to actually assessing the impact of AHTs. While the largest response segment (around 45%) thought they were in a position to evaluate and understand the cost to the their business of AHTs, this is still short of a majority of course. Just under 40% thought they were in a position to assess is “to some extent”, while just over 15% stated they were not in such a position.
Clearly, something that would help participants better understand the impact of AHTs, are clearer disclosures and greater transparency from LPs and again, the survey response is heavily skewed to the view that more work needs to be done.
In terms of disclosures, 95% of 102 respondents believed client-specific AHT should be explicitly disclosed, while 92% of 103 answers agreed that the use of AHTs to manage market impact and adverse selection should be a specific disclosure. Strength of opinion slipped very slightly when it comes to disclosing the minimum and maximum AHTs, with 87% agreeing it should be a specific disclosure (8% answered “don’t know” to this question), while 89% of 102 respondents believed that changes to a client’s hold time should be disclosed by a specific notification.
Of concern, only 11% of respondents believed their LP disclosures gave them sufficient information to be adequately informed about the cost of their deal acceptance practices. Almost 45% specifically thought the disclosures were not clear enough, while over 30% selected the witty response of “hard to tell without a law degree and a quantitative PhD”, and just over 15% didn’t know.
It what may or may not be a timely nudge to the GFXC as it prepares to release responses to its last look guidance paper consultation (and the final paper itself), around 90% of respondents believed the FX Global Code should provide further prescriptive guidance on last look so that the issue is solved.