As spot foreign exchange trading becomes more electronic, trading platforms are attracting more scrutiny.
So-called electronic communications networks (ECNs) set the rules for the liquidity providers (LPs) that make prices on their platforms. As of August 6, some 18 trading venues had signed the forex global code of conduct, which sought to strengthen dealing standards after a series of fixing scandals.
Principle 17 of the code encourages LPs to disclose their last look policies, which govern the period of time after an order is received but before execution, during which an LP conducts credit and price checks, sometimes with an add-on period for further monitoring.
Last look is a matter of some controversy, and Risk.net’s analysis of the top 50 LPs in forex shows a spread of practices. Nearly a quarter of firms don’t disclose anything, so participants on anonymous ECNs could be sending orders to counterparties with questionable or opaque last look policies.
In theory, ECNs could be an ideal partner for the Global Foreign Exchange Committee, a group of central banks and market participants that wrote the code, to ensure these standards are being met across the LP community.
ECNs don’t see it that way, however. Risk.net understands that while some platforms – including EBS Market and Refinitiv Matching – do not allow last look checks, many others do permit it, subject to a few conditions.
One ECN tells Risk.net it enforces a maximum hold time of 100 milliseconds for last look and a minimum order acceptance rate of 75%. Nine LPs were removed from the platform after these standards were put in place. But it’s the exception rather than the rule.
ECNs are in a unique market position, which if used effectively could help boost disclosure of dealing standards across the market
An alternative is to require LPs on a platform to make extensive disclosures on their last look practices, including hold times, policies for rejecting orders and use of rejected order information. But on this, ECNs are largely silent.
One ECN defends its stance to Risk.net, saying they are “not the policeman of the code”.
This approach has angered some LPs, who claim they are put into competition on the platforms against firms that might engage in predatory last look practices.
Some claim it’s a race to the bottom – setting higher minimum standards or requiring extensive disclosures for last look policies could put off too many potential LPs, reducing liquidity on the venue.
Nevertheless, ECNs are in a unique market position, which if used effectively could help boost disclosure of dealing standards across the market.