Addressing the Global Code of Conduct and Last Look Policy

This article was written by David Mercer, CEO of LMAX Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term.

Previously, I touched on the issue of pre-hedging, or to more aptly name it, ‘Prehedgeosaurus’. Now we are going to take a closer look at ‘Lastlookosaurus’, otherwise known as Principle 17.

And so on to our old pal Lastlookosaurus who makes his glorious last stand in Principle 17. A nirvanic world where ‘Last Look Last Look Last look is defined as the process where liquidity providers (LP) are rendered the chance to reject trades within a specific period. Generally, this practice by brokers is used to mitigate risk while rendering more favorable terms to the LP. This is due to significant risk that can arise from poorly concocted price quotes that can be used as an advantage by latency arbitragers. Not all last look settings are the same.Last look settings tend to vary by client, trading platform, a client’s connec Last look is defined as the process where liquidity providers (LP) are rendered the chance to reject trades within a specific period. Generally, this practice by brokers is used to mitigate risk while rendering more favorable terms to the LP. This is due to significant risk that can arise from poorly concocted price quotes that can be used as an advantage by latency arbitragers. Not all last look settings are the same.Last look settings tend to vary by client, trading platform, a client’s connec Read this Term’ is transparent and clients have the use of ‘last look’ disclosed. Yes this is the same beast that cast its shadow over most of the scandals in the last few years. The same beast currently at the center of a well publicized US case against a large bank and the same beast whose abuse was highlighted in the latest CFTC fine.

Lastlookosaurus tells us in the code that last look may only be used as a risk control mechanism in order to verify validity and/or price. There is mention of consistency with the current market price but no mention of a timeframe for that consistency – in previous drafts a 100ms window was mentioned but that has disappeared from the latest draft of the Global Code.

There is no detail around last look, merely the mention that any trading activity and hedging activity is 'likely' inconsistent with good market practice. This is wooliness of mammoth proportions! The real T-Rex and Stegosauraus both became extinct at around the same point in prehistoric time. The same should be true of Lastlookosaurus and Prehedgeosaurus.

Principles 11 and 17 of the Global Code are the worst examples of consensus where no one individually actually believes in what is said collectively. The authors of the code, the working groups and the participants should stand up, speak out and reconsider this draft before it is too late.

There is an opportunity for everyone involved to lead. The code is failing in its duty of care to clients, by the legitimization of these flawed principles. Modern day FX practitioners should not be asked to adhere to principles from a Jurassic era.