Investment Association Last Look
The Investment Association (‘the IA’) which represents UK investment managers and has over 220 members who collectively manage more than £6.9 trillion of behalf of clients, has published a position paper on ‘Last Look’.
The practice of Last Look – whereby a Market Participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price – has received considerable attention in recent months, particularly as it is proposed to retain the practice under the FX Global Code of Conduct 1 . There are concerns that the use of Last Look provides dealers with a significant information advantage and disadvantages client execution.
The IA believes that ‘Last Look may have valid applications in order to protect Market Participants from taking on too much risk but that investors also note that not “Last Looking” is not necessarily an indication of good behaviour or quality of execution in and of itself. For example, some High Frequency Traders or banks could use pools which have no Last Look to rapidly manage their risk ahead of less speedy market participants. Such behaviour could potentially create more market impact than otherwise.’
The IA believes that there remain concerns about the way in which Last Look is sometimes applied, particularly with regard to Last Look policy and process transparency; unacceptable practices and data disclosures and timestamps
The Investment Association has developed its own position paper on the use of Last Look, setting out recommendations for how these concerns may be best addressed by Liquidity Providers (LP’s) and venues.
LP’s should provide each client with a clear definition of Last Look and the process of use. It should be sent annually and firms should make investors aware of the Last Look price tolerance of orders. This should be made clear at the outset in the firm’s Terms of Business.
LP’s should formally inform clients when Last Look is applied to a trade and explain if and why a trade is rejected, drawing from a standard list of reasons, including price tolerance; price improvement for the client; internal credit checks or breaches and latency.
The IA considers some instances where the use of Last look is unacceptable including pre- hedging during the Last Look window; trading activity based on information from rejected trades and trading activity based upon requests for quotation which are in progress or not won. LP’s should state in their Terms of Business that they do not engage in any of these practices.
To aid investors, venues should sign up to the Global Code of Conduct and make their Last Look policies available to clients.
It is important for investors to know whether a venue requires LP’s to sign up to the Code.
At a ‘base case’ minimum, all trades should include data and accurate time-stamping for the following:
CCY Pair
CCY bought/sold
Amount bought/sold
Direction (buy or sell)
Price
Product (e.g. spot, FWD, FX Swap, NDF)
Submitted by the Buy Side firm
Received by the LP
Rejected by the LP
Completed by the LP
Ideally however disclosures would go further. The following data should be available from the executing bank. The IA would also encourage multi-bank platforms to store and provide this data, which, in addition to the above, would also include:
Venue (The ECN upon which the order was filled e.g. EBS)
When the order was passed to the 3rd party source of liquidity
When the order was received by the 3rd party
When the order was rejected (and reason code) by the 3rd party
PM Order Inception (Time order is originated by the portfolio manager in a standardised format)
Desk Arrival (Time order arrives at the execution desk)
Market Arrival (Time order is submitted for execution)
Strategy (Category Type for Algos)
Algo Name (Specific Name of Algo)
Algo Style (Category Execution Style for Algos e.g. Passive)
Limit (Limit price of an Algo if available)
Execution Type Execution Style for Algo child slices (e.g. Passive)
Trade Type (Method of execution e.g. Voice)
Channel (The platform over which the trade was executed, e.g. FXAll)
Counterparty (Executing counterparty or broker)
Portfolio (Identifier for portfolio or account from which the trade originated)
Trader (Trader responsible for the trade)
Manager (Manager of the portfolio being traded)
Desk (Investment Desk managing the trade)
Value Date (Maturity date for the Forward or Swap trade)
Forward Points (Forward points in basis points)
Forward Rate (Forward Rate)
Order ID (Unique ID for the order)
Parent Order ID (Unique ID for the parent order)
Client Order ID (Unique ID for the order that the client associates with)
Notes (Custom comments associated with the trade)
Algo’s – child order visibility
A ‘child order’ occurs when an algorithm breaks one or more large orders (‘parent orders’) into a series of smaller trades.
Algos traditionally have low levels of transparency as to how child orders are handled – for example, if they are being completed, or if they have been Last Looked. Improved transparency is vital in helping firms to conduct long term analysis on the performance of LP’s and venues as:
Without it, whilst a firm may be able to judge the cost versus arrival price or expected cost, it may not allow the firm to see what they are paying away on individual orders
Overall performance may look good versus an expected benchmark but this may mask costs that are being lost in individual executions
There are concerns about signalling risk and information leakage during the Last Look window.
Only with this information can members determine the full cost of Last Look, as at least as much potential value is lost on rejected orders as on filled orders.
The IA feels it is hugely important to have all child order details, including rejected orders as well as fills, delivered as part of the data and time-stamping disclosures requested above.