The world’s largest asset managers today tried to clamp down on the controversial “last look” practice which allows banks and brokers to reject orders even after a price has been agreed, although it faced concern from industry that it does not go far enough.
The Investment Association (IA) today said those liquidity providers like banks and brokers should be forced to explain their reasons if they do reject a trade, in a bid to “shine a light” on the practice.
The IA, which represents a host of the world’s largest asset managers such as Blackrock and J.P. Morgan, said there are certain situations where last look should “no longer be considered acceptable due to the potential for misuse of information by the liquidity provider”, although it stopped well short of calling for a complete ban.
The IA’s call for transparency is “very worthy, but I'm not sure it has gone far enough,” said David Mercer, chief executive of London-based LMAX Exchange.
Last look is the controversial practice in which liquidity providers can reject currency orders – even when buyers meet the price quoted. It allows providers to quote a tighter spread, theoretically lowering costs, but it is also open to abuse.
The IA said last look should not be used for firms to hedge their exposures before a client’s trade is carried out, or to trade using knowledge of orders which either have not been completed or which are rejected.
Critics of last look say it allows liquidity providers to profit at the expense of their clients, including large investment trading firms, by rejecting orders if the currency moves against them.
The practice can also mean that quoted prices are not actually available, hiding liquidity problems until it is too late.
Mercer, an outspoken critic of last look, told City A.M. the IA had been left in an “invidious position” defending an industry standard which will be impossible to police. The standard, laid out in last May’s voluntary FX global code of conduct from the Bank of England, was criticised at the time for not cracking down on last look.
“It's entirely possible for trading to happen in the last look window and comply with the code,” Mercer said. “How are you ever going to police pre-trade hedging?”
He added: "Nine months on from the introduction of the global code of conduct and only a limited number of institutions have signed up to the code. The industry should, therefore, be evaluating the success of the code in light of this slow adoption rate and questioning what can be done to improve the number of signatories."
Galina Dimitrova, director of investment and capital markets at the IA, said: “Investors have long been concerned about the lack of transparency around last look.
She said the guidelines will “provide asset managers with much-needed information on their trades so that they can fully understand the impact of last look on their business.”