Is this the end of last look execution? Barclays FX division hands information over to authorities as part of $50 million class action settlement

The class action civil lawsuits that followed the multi-billion dollar regulatory censuring of major banks by British, North American and Swiss regulatory authorities in late 2014 is still in full swing, long after six major FX dealers were fined $4.3 billion collectively for FX benchmark rigging.

Yesterday, further information emerged as Barclays PLC (LON:BARC) agreed to reveal information from employees within its FX divisions, in particular those experienced in the bank’s ‘last look’ practices and the extent of its impact as part of the $50 million settlement agreement of a class action suit instigated by Axiom Investment Advisors.

The practice of executing trades via ‘last look’ methodology has been the subject of regulatory discourse over recent times, however Barclays’ institutional BARX platform continues to offer a last look execution facility.

In May last year, Thomson Reuters and BATS Global Markets, some of hte largest institional FX platforms in the world, concurrently limited the last look facility on their platforms in order to move toward greater transparency in the FX market.

At that time, regulatory authorities in prominent institutional FX centers on both sides of the Atlantic, namely New York, Chicago and London, had begun to express concern about the efforts of interbank and institutional traders which sought to manipulate a range of financial markets.

Last summer, at the time during which BATS Global Markets and Thomson Reuters which owns the FXall ECN platform having bought it for $625 million in 2012, continued to offer last look, along with Barclays in the interbank sector, whilst most FX platforms had already prohibited last look execution.

In this particular cooperation with the authorities, Barclays is likely to provide vital information which will be required by investors in order to pursue other institutional market makers who could be construed to have benefited from trades having been rejected if the price had moved in favor of the customer.

This level of cooperation is expected to provide investors with the ammunition they need to pursue other market-makers who they believe benefited from rejecting deals if the price moved in favour of the customer.

Whether the court which hears the class action suit will accept this as part of a settlement remains unknown, however the litigation is being examined very closely by major law firms.

George Zelcs, a partner at law firm Korein Tillery in Chicago, one of the firms representing Axiom, explained to FXWeek yesterday “Cooperation from an early settler, like Barclays, is an important benefit to class members. It not only helps us understand Barclays’ practice, but also aids us in understanding industry practices that can be helpful in prosecuting other banks that employed last look. As a result, under the terms of the settlement they are obligated to cooperate with us. The intent of that cooperation provision is to provide information from people in their FX units that have the most knowledge of how this practice was utilised and who it impacted and how much impact.”

The pending settlement agreement with Axiom has come to fruition three months after regulators at the New York State Department of Financial Services fined the bank $150 million for similar misconduct and forced it to fire its global head of electronic fixed income, currencies and commodities.

Additionally, this had occurred after regulators in the UK conducted their own review into the supervision and transparency of specific markets, of which the FX sector was a major priority. The Fair and Effective Markets Review, or FEMR, specifically asked asset managers and other bank clients about their views on last look in May 2015.

Often, market-makers use the last-look technique to review and reject trades within a certain timeframe in order to protect themselves from sudden price swings.

However, over the years, the risk management tool has been used by some to unfairly maximise profits at the expense of their customers’ pockets and knowledge.

That lack of disclosure and the presumed dishonest gains are at issue for regulators and investors in the high-profile case between Axiom and Barclays. Both regulators and Axiom have stated that the bank applied the system broadly and did not separate toxic flows from genuine trades. On top of that, senior employees took steps to hide the use of last look from customers and the bank’s own sales team.

In the initial complaint filed in November 2015, Axiom alleged that Barclays rejected hundreds of matched electronics FX trades daily using last look between 2009 and 2015 both on its BARX platform and various third-party electronic communication networks (ECNs).

Axiom had stated within its litigation “Such practices involved putting holds on foreign exchange orders that lasted milliseconds but represented an eternity in the FX market, and allowed the bank to determine if the price a customer sought to pay was outside a certain range. If that price was deemed unprofitable for Barclays, the bank would enter a worse price or cancel trades with little or no explanation.”

The settlement class includes anyone who was affected by these practices between June 1, 2008, and the date the settlement is preliminarily approved, as long as they lived in the U.S. or placed an order using BARX, the bank’s electronic trading platform. Axiom has estimated the size of this class at less than 1,000 people.

Photograph: Barclays head office in Canary Wharf, London E14