What Specific Information Must Liquidity Providers Disclose about Their Last Look Practices?

Concept

The Mandate for Transparency in Last Look Practices

Liquidity providers in the foreign exchange market are subject to a detailed set of disclosure requirements concerning their last look practices. These obligations are not born out of a vacuum; they represent a concerted effort by the Global Foreign Exchange Committee (GFXC) to bring transparency and fairness to a practice that was once opaque. The FX Global Code, a set of principles for the wholesale foreign exchange market, is the primary source of these disclosure standards.

At its core, the Code seeks to ensure that clients of liquidity providers can make informed decisions about the execution of their trades. This is achieved through a standardized disclosure framework that allows for clear comparison and evaluation of different liquidity providers’ last look procedures.

The FX Global Code’s disclosure requirements for last look practices are designed to provide clients with the necessary information to understand and evaluate the execution of their trades.

Understanding the Core Principles of Last Look Disclosure

The GFXC’s approach to last look disclosure is centered on the concept of “informed consent.” This means that liquidity providers must provide clients with enough information to understand how their orders will be handled, particularly in the final moments before execution. The key disclosures revolve around the following areas:

• The use of last look ▴ Whether the liquidity provider employs last look at all.
• Symmetry ▴ Whether the last look practice is symmetrical or asymmetrical.
• The last look window ▴ The maximum and minimum duration of the last look window.
• Trading during the last look window ▴ Whether the liquidity provider engages in any trading activity during the last look window.

These disclosures are designed to give clients a clear picture of the potential for their trades to be rejected and the circumstances under which this might occur. They also provide insight into the liquidity provider’s risk management practices and how they handle client information.

Strategy

The Disclosure Cover Sheet a Strategic Framework

To standardize and simplify the disclosure process, the GFXC has created a “Liquidity Provider Disclosure Cover Sheet.” This document serves as a high-level summary of a liquidity provider’s practices, with a specific section dedicated to last look. The cover sheet is not intended to replace more detailed disclosures but rather to provide a consistent and easily digestible format for clients to compare different providers. The structure of the last look section of the cover sheet is as follows:

Symmetrical Vs Asymmetrical Last Look a Key Distinction

One of the most critical disclosures a liquidity provider must make is whether its last look practice is symmetrical or asymmetrical. This distinction has significant implications for the client’s execution experience.

• Symmetrical Last Look ▴ In a symmetrical last look environment, a trade will be rejected if the price moves against the liquidity provider by a certain amount, and it will also be rejected if the price moves in favor of the liquidity provider by the same amount. This approach is generally considered to be fairer to the client, as it removes the incentive for the liquidity provider to only reject trades that have moved against them.
• Asymmetrical Last Look ▴ In an asymmetrical last look environment, a trade will be rejected if the price moves against the liquidity provider, but it will be accepted if the price moves in favor of the liquidity provider. This practice can be seen as giving the liquidity provider an unfair advantage, as they can selectively reject unprofitable trades while accepting profitable ones.

The FX Global Code does not prohibit asymmetrical last look, but it does require that it be disclosed. This allows clients to make an informed decision about whether they are comfortable with this practice.

Execution

The Last Look Window a Temporal Analysis

The disclosure of the last look window’s duration is another crucial piece of information for clients. This window represents the period of time during which the client is exposed to the risk of their trade being rejected. A longer last look window means more uncertainty for the client.

The GFXC’s guidance encourages liquidity providers to keep this window as short as possible. The disclosure of the minimum and maximum window times allows clients to assess the potential for delays in their trade execution.

The duration of the last look window is a direct measure of the client’s exposure to execution uncertainty.

Trading during the Last Look Window the Ultimate Transparency Test

Perhaps the most contentious aspect of last look is the potential for a liquidity provider to trade for its own account during the last look window, using the information from a client’s trade request. This practice, known as “front-running,” is strictly prohibited by the FX Global Code. The disclosure cover sheet requires a clear “Yes/No” answer to the question of whether the liquidity provider trades during the last look window. This is a critical piece of information for clients, as it speaks directly to the integrity of the liquidity provider’s execution practices.

Client Data and Information Handling

Beyond the specific mechanics of last look, liquidity providers are also expected to disclose how they handle client data and information. This includes:

1. Information Sharing ▴ Whether client information is shared with any third parties.
2. Anonymization ▴ The extent to which client data is anonymized before being used for any analysis or reporting.
3. Use of Data ▴ How the liquidity provider uses client data, including for risk management, trade surveillance, and market analysis.

These disclosures are designed to give clients confidence that their trading activity is not being used in a way that could be detrimental to their interests.

Reflection

From Disclosure to Diligence

The disclosure requirements for last look practices represent a significant step forward for the foreign exchange market. They provide a framework for transparency and accountability that was previously lacking. However, disclosure alone is not enough.

Clients of liquidity providers must also be diligent in their review of these disclosures and use them to make informed decisions about their execution. The ultimate goal is a market where all participants have a clear understanding of the rules of engagement and can trade with confidence.