As the first market participant to commit to the FX Global Code, LMAX Exchange welcomes the opportunity to provide feedback on Last Look practices in the Foreign Exchange Market.
Though the FX Global Code is a positive starting point for restoring trust in the FX industry and creating globally consistent guidance, LMAX Exchange doesn’t believe that the Code goes far enough on restricting or banning the potential market abuse that can result from the use of ‘pre-hedging’ and ‘last look’, in its wording of Principle 17.
Questions: Principle 17 of the Code states that “During the last look window, trading activity that utilises the information from the Client’s trade request, including any related hedging activity, is likely inconsistent with good market practice because it may signal to other Market Participants the Client’s trading intent, skewing market prices against the Client, which (1) is not likely to benefit the Client, and (2) in the event that the Market Participant rejects the Client’s request to trade, constitutes use of Confidential Information in a manner not specified by the Client”.
LMAX Exchange agrees that any trading activity, utilising the Client’s order information, during the ‘Last Look’ window does not benefit the client and at the very least, constitutes use of confidential information in a manner not specified by the client. Furthermore, we are not aware of any situation or scenario where pre-hedging during the ‘Last Look’ window can be beneficial to the client or where clients benefit from skewed market prices against their orders, caused by information leakage during the ‘Last look’ window.
The current wording in Principle 17 effectively legitimises pre-hedging, which could stand accused as front-running during the ‘Last Look’ window. Legitimate working of a client order will be indistinguishable from unethical front-running for pure profit-making utilising privileged Client’s order information. Front-running is considered ‘unethical practice’ in capital markets, defined as ‘unethical practice whereby someone with advance knowledge of a specific market order in, say, shares, bonds or a currency from a client steps in ahead and buys for their own account. When the client’s usually much larger order is executed and drives up the price, the private purchase can be sold at a profit’. Thus, if front-running is acknowledged as ‘unethical’ across all asset classes, why isn’t there a stronger stance in the Global Code on pre-hedging activity during the ‘last look’ window?
Thus, as a direct response to the consultation questions, LMAX Exchange recommends removing ‘likely’ from ‘likely inconsistent with good market practice’ in the wording of Principle 17, referring to ‘any hedging activity during the last look window utilising the information from the Client’s trade request.
Longer-term, LMAX Exchange believes that the Code should ban ‘last look’ at least on anonymous multi-dealer trading venues; it can be argued that the practice may still have its place in the disclosed bi-lateral trading relationships (i.e., bank to specific client), if both counterparties prefer to trade with ‘last look’. Banning ‘last look’ will avoid any potential for market abuse, that has already been evidenced by recent scandals and legal investigations for the misuse of ‘last look’ by some of the most reputable, global financial institutions. LMAX Exchange believes that the need for ‘last look’ has become obsolete; the technological advancements and availability of real-time streaming market data, enabling instantaneous price checks, have entirely eliminated the need for ‘last look’ as a risk management tool. The practice of ‘last look’ that doesn’t exist in any other asset class, erodes trust in FX trading at the time when the industry needs to reinstate much-needed transparency and fairness in FX markets.