The Last Look…
FX Global Code only liquidity – discuss…
Well, the first thing to stress is that I fully support the efforts being made in the industry to help force more LPs to the FX Global Code by limiting access to certain pools of liquidity. However, and we all knew this was coming, there remain questions to be answered and issues to be solved.
Everything has to start somewhere, and it is good that some venues insist LPs have to be “current” with the Code or else stream firm liquidity only – in some ways this is the FX industry acknowledging the challenges around the use of last look and trying to raise general standards to those of the firm-only venues such as EBS Market, LMAX Exchange and Refinitiv Matching.
The problem is, however, can we actually verify that all LPs are adhering to the principles of the Code? More pertinently, how can we assess any LP’s adherence when the information provided is incomplete?
To take a few examples – and I want to stress here that I am not suggesting that anything untoward is happening, it’s just that the information levels available to a casual observer are sub-optimal – what do ANZ, CIBC, Credit Agricole and United Overseas Bank have in common? While they may exist, I cannot find a disclosure cover sheet on the Global Foreign Exchange Committee website, which is where they should be.
With all due respect to those players, none are what we would call a major player on the global stage, they have crucial specialties and their contribution to the overall is important, but what about BNY Mellon, one of the biggest custodians? Or Bank of America, one of the largest corporate FX banks? It is the same with those two firms, a cover sheet is hard to find, if it exists.
Move further up the ladder, especially when it comes to the anonymous ECN world, which is really where these issues play out, and neither HC Technologies nor Jump Trading offer a cover sheet.
To be clear, all of these firms have re-affirmed their commitment to the Code in the past two months, but without a cover sheet are we lacking information on what their perception of best practice is and how the Code is applied? The rest of the major FX banking players as well as Citadel Securities and XTX Markets provide a cover sheet, so what’s the hold up elsewhere? The GFXC gave the market a full year (and change) to adopt to the updated Code and the vast majority managed to do so pretty quickly, but surely we should have more than just a signed piece of paper? In the spirit of true transparency of action, surely cover sheets are important?
How can some LPs monetise what is clearly tricky flow when others cannot?
I believe they are because I have had a number of conversations with people familiar with the changes at the ECNs regarding Code-only liquidity and some LPs are insistent that when some LPs were removed for a brief period (or longer), the additional flow to those remaining players was “hard to monetise” in the words of one and “toxic” in the words of another.
The question these players ask is, how can some LPs monetise what is clearly tricky flow when they cannot? Obviously, there are sometimes natural fits for certain types of business, but I am assured that the flow related to this episode is from “customers” trading aggressively. It could be different mark-out calculations – one firm’s flow looks horrible for 200 milliseconds but great after one minute, for example – but the feeling amongst traders is that a minority of LPs are still “playing games” as one LP put it, with this flow, to enable them to monetise it.
My discussions have been far-ranging on this, and generally one conclusion is arrived at – additional hold time or trading in the last look window; both of which are frowned upon by the Code, are likely to be involved.
So what can we do about it? Talk to any platform and they are quick to point out how their hands are tied and how they can’t police general behaviour when they only see a fraction of it. Fair enough, but as one person suggested to me, there is something that can be done – more granular data from all the venues.
Proving adherence has always been viewed as a challenge for the Code since inception and the sense is the GFXC has gone as far as it can at this time.
If liquidity consumers are able to access round trip times broken down across those LPs that are co-located and those that are not, it would be a big help, especially if the median data is also provided. Equally, the venues could provide more detail around the asymmetric nature of last look, by providing accept and reject round trip times by LP. These data are offered in some places, but surely it needs to become market standard best practice to ensure that adherence in this controversial area is adequate?
Proving adherence has always been viewed as a challenge for the Code since inception and the sense is the GFXC has gone as far as it can at this time. It is helpful that regulators such as the UK’s FCA or Australia’s ASIC have adopted the Code as the basis for their expectations of behaviour (and would be more helpful if other regulators followed their lead), but there are still areas where the FX industry can help, such as that suggested above.
The buy side can also help – if it can be bothered – because a lot of bank algos, operating on the buy side’s behalf, are accessing this liquidity, can they be sure it is all Code-compliant in practice rather than theory? Perhaps if the buy side insisted algo providers hit Code-only liquidity, there will be a greater push – and analysis – of LP conduct to ensure the standards we seem to be setting as an industry, are maintained? If that is the case then the disclosure cover sheets will be an important part of this. To reiterate, I am not suggesting anything wrong is taking place with participants that do not have a GFXC-available cover sheet, but the rest of the industry is lacking information on these firms’ understanding of best practice.
Perhaps another step to be taken is for the buy side and their execution partners to agree only to hit liquidity from participants with cover sheets available to the public? It won’t stop anyone from playing around, but again it lifts the veil on some firms’ understanding of the Code’s principles.
There is hope that this push towards Code-compliance in anonymous venues will help propel more FX market participants to adhere and raise their transparency levels, and there is also one potentially pleasing statistic available. Although it is early days and a limited sample size, in the weeks since CboeFX announced it was banning non-FX Global Code compliant firms from its full amount streams unless they were streaming “firm”, the percentage of firm liquidity executed on the firm’s venues has risen from its recent average around the 30% mark to above 32%. Early days, yes (the percentage was slightly higher for much of 2020), but potentially a positive sign that clients are providing some support for platforms’ efforts to bolster behaviour on their venues.