The Last Look…
Posted by Colin Lambert. Last updated: March 7, 2023
The noose is closing inexorably around those firms in the FX market that believe they can use last look with abandon and as a free option.
This week’s news that EBS is taking non-Code compliant LPs off its Direct platform is a significant one because we are talking about a platform that is largely disclosed and relationship-driven. Previously those platforms that pioneered this shift in attitude, did so in their anonymous or ECN environments.
As always, I can nitpick the changes of course. Namely, if the 2022 average for response times was 12ms as EBS reports, why lower the threshold to 30ms? Why not make it 15, or perhaps 20? Clearly 200ms was ridiculous and out-of-date, but was there an opportunity to make an even stronger statement of intent by going lower?
If the threshold was reduced to 15ms, as an example, that would severely limit the ability of “Code compliant” LPs to introduce asymmetry to their response times (and yes, I parenthesise because asymmetry is additional hold time).
That is though, as I said, nitpicking, because I, and hopefully the rest of the industry, welcome this announcement as the next step in increasing Code compliance amongst LPs. Yes, 96% of EBS Direct volume was with Code-compliant LPs, but the 4% is what will drag the industry into the dirt again if anything untoward ever goes on (and there is no overt suggestion that it did) – the Code is there to protect the FX industry and as such should be adhered to as closely as possible by all participants.
Just as we saw the Cboe FX, 360T, Euronext FX and second Cboe FX changes create a virtual game of leapfrog over the past six months in terms of how far Code-compliance permeated their businesses, so I hope that EBS’ move triggers no little introspection at the other relationship-based platforms. Thus far LSEG’s FXall and State Street’s Currenex have been quiet on this, while 360T has not yet extended its Code requirement beyond its ECN. It will be interesting to see the approach taken by other platforms that also support last look, such as Bid FX, Integral and FXSpotStream, in the wake of this move.
Sometimes you have to lead the client and do something that is clearly for their own good, even if they are (often neglectfully) oblivious to it
In itself, this shift is unlikely to see EBS Direct pick up a lot of extra business, but as part of a trend it could be important. The more platforms support Code-compliant liquidity, the more buy side firms will be aware of its value, therefore as more buy side firms seek to build redundancy into their FX trading workflow with an extra execution venue, in the medium term, supporting Code compliance could make a difference – especially if it does become an ESG item for these firms.
As hinted at earlier, and as I have written before, the industry cannot rest on its laurels and rely upon a steady stream of venues demanding Code compliance, however, because there is also the question of adherence. Asymmetric response times are clear evidence of additional hold time on one side of the ledger and should be stamped out – the people best placed to do this are the platforms themselves. I understand nothing can be done if an LP is asymmetric across different venues – that is for the client to highlight – but on a single firm’s venues? That is a different matter.
There is one other aspect of this change that I want to praise EBS for – and I suggest, mentioning no names, that another institution in the FX industry could learn something from how it has been achieved.
EBS has long had a well-respected data and analytics platform that provided clients with much of the data they required to make an informed decision on the cost of rejects, for example, from longer, or asymmetric, hold times. Too many liquidity consumers failed in their duty to study this data, (you can lead a horse to water…), and continued trading with non-Code compliant LPs with their extended hold times and more costly reject rates.
We all knew this was taking place, but the consumers were either too complacent or inadequately equipped to make the necessary change. EBS, however, did not let that stop it from adjusting its rule book. The lesson is clear; sometimes you have to lead the client and do something that is clearly for their own good, even if they are (often neglectfully) oblivious to it. Bravo!