The Last Look…

Forget the old adage about leading a horse to water, in our world it seems you can lead a trader to data…but you can’t make them read it.

I had a conversation with someone last week who is an active participant in the FX market, most often as a liquidity consumer. They have been around long enough for me to have known them in my trading days and, I think, they are a sophisticated player…except they are also a moron (so no, I am not going to go soft because I only have a month and a bit left!)

We were talking LP performance after my friend – and they are a friend – decided to poke the bear by declaring all liquidity is equal. This, naturally, triggered me (it’s one of about 45 things that can do that) so we got into it. I should highlight that my friend’s firm’s LPs were all banks, so I can, to a degree, see where the observation comes from, but even then, what followed surprised and depressed me in equal measure.

I asked about reject rates…blank.

I asked about last look round-trip times…blank.

I asked about cost of rejects…blank.

I asked about market impact…you guessed it…blank.

There are some decent amounts involved in the business involved, and although I can’t give too much away, I can say the firm involved is what I would call a genuine buy side participant. This makes it surprising to me that there is no attempt to even monitor LP performance.

On the subject of market impact, my friend merely observed that they saw “nothing special” when they trade in the market, which either means it’s good internalisation flow or it is not directional in any sense. I was less bothered by this, because LPs can have really good relationships with certain clients where even bigger tickets are priced fairly and absorbed relatively easily.

What bothered me was the lack of understanding around rejects and last look response times. The firm is getting rejected, not on a major basis it seems, but often enough to push fill rates into the mid-90 percents. This is not serious, but I would have thought it worth a look, not least to work out the cost of rejects, why they are happening, and whether anything could be done about improving it?

Interestingly, while the firm uses a couple of trading channels, it did not easily have access to cost of rejects data, which is something that all venues should be providing surely (and LPs I would argue). What was available was last look response times – and, on my prompting, my friend called up a report. Apparently, across five LPs, three had asymmetric response times, one by a few milliseconds, the others in double figures.

We cannot and must not take the FX Global Code for granted

I would argue, as I have before, that this is in breach of the principles of the FX Global Code, which says all trade requests should be dealt with as soon as possible, accept or reject. I know it goes on, but I am surprised that it happens in such a small pool of LPs. Equally, if an LP is not adhering the Code’s recommendation for symmetry in last look response times, it is the consumer’s responsibility to raise this issue, something that was obviously missed by my friend’s firm!

So here we are, nearly 10 years on from the Code’s inception, and on one small, but important area, it is still not having an impact. I used the chat to explain to my friend why their firm should take more of an interest in the Code, however, sadly but unsurprisingly, I got the response that it was aimed at the sell side.

The good news is that my sense is that in the broader environment, consumers are using the data around rejects and last look more than they used to, but there are still clearly hold outs. On one hand I look at it and think “well, that’s their business and if they’re giving money away so be it”, but on the other it irritates me that the message on behaviour is not getting through.

This highlights the importance of the industry continuing to promote the benefits of the Code – we cannot and must not take it for granted – and engagement with the buy side remains critical, and, sadly, a little underwhelming, especially in the hedge fund space.

This chat could, conceivably, have been a one-off instance, and hopefully it is, but as someone who has spent 20-years or more warning of the need to monitor last look and reject times more closely, boy was it depressing!

colin@thefullfx.com