By Robin Poynder, FMR advisory.
Advancements in price distribution technologies and the advent of high frequency trading have forced firms’ IT departments to establish strict controls around best practice pricing for trades. CEO of FMR Advisory, Robin Poynder, explains the need for a standardised protection mechanism “last look”.
“Some argue that last look is a necessary protection in order to provide broad customer pricing, whilst others suggest it encourages unfair advantage to the price-makers.”
Over the last few months, the topics of conduct risk and behavioural risk together with general management concern around how to demonstrate to the regulators that a given business is behaving correctly, have come up again and again. As the conversations have focused in on these areas, the topic of “last look” and how price-makers are managing the risk of e-distribution of prices is attracting attention.
FMR Advisory held a roundtable on Monday, 15 December to tease out the background to this methodology, the current implementations, some potential issues such as they are and any potential remedial approaches. With participation from the banking, legal, infrastructure provider and broker communities, a highly topical discussion highlighted a number of key themes, questions and responses.
So what is last look?
The use of last look is not a new phenomenon. Thirty years ago, voice brokers were employing a version of last look when passing interest and messages across desks, firms and countries. With several ‘hops’ between the trading counterparties, there was always the potential for the broker to be ‘dropped’ where a price was relayed from the original price-maker out to colleagues via a link-man into a different office in a different country. By the time the bank on the other end of the chain was trying to trade, the original price-maker had likely indicated his intention to change the price due to a move in the underlying market. The ability not to complete the attempted trade was a necessary part of broking, and all participants in the markets understood the need for this check-point that had developed as a protection method to foster price-making in general.
As e-distribution of prices developed, the possibility of high frequency trading (HFT) within the FX market and across the multiple venues that sprung up became a reality. The technological challenges of managing those trade flows demanded the ability to manage prices and trades at a far more detailed level than had previously been the case. The challenge in developing last look where, at the time, there was no baseline definition, was that the business and IT managers were required to define the approach in a certain degree of isolation from other institutions – and so differences inevitably came into being. Bearing in mind the vastly different demands from a wide variety of client types, different price-makers manage price flows in different ways.
Last look is a protection mechanism for price-makers that has evolved over many years and continues to do so. The main market operators are already further enhancing their approach to how last look is implemented and managed, acknowledging that a group of clients who are of significant importance to the wider market are actively requesting last look implementation. The two main points around current understanding of best practice are 1) that the clients whose price stream is affected by last look should have consciously selected that implementation and 2) that the use of last look in general is not used as a profit-generating mechanism per se, but is rather a pricing tool that allows tighter spreads for those relevant clients and a protection mechanism for ePricing.
Market price-makers are actively examining their policies to find a default approach to price distribution where last look is enacted in a controlled and defined manner. Its use as an error capture mechanism is key as a protection that allows better pricing to a wide range of clients, however, the consensus was that clients should have to opt in to this as an active choice, which means the wide masses of SME clients getting no last look pricing. Being a market leader in any evolution carries its own risk.
For further MiFID II debate and discussion join MiFID II: The working group from JWG on LinkedIn