About time! Why the David & Goliath battle between Alpari and Citigroup over last look execution is a good thing – Op Ed

It is very refreshing to see a brokerage tackle the Tier 1 banks for rejecting trades – Here is my detailed opinion on why Alpari is doing the right thing

Is this the end of last look execution

It had to happen at some point, the question was always surrounding exactly when, and which non-bank electronic trading firm would actually have the mettle to stand up to the Tier 1 banks.

Yesterday, Alpari (US), a now dissolved entity which in its heydey was led by the headstrong Daniel Skowronski, began its David and Goliath-esque litigious battle against Citigroup, the world’s largest interbank Tier 1 FX dealer by market share, for practice of ‘last look’ execution, which is the bete noire of the entire non-bank OTC sector right through from intitutional ECNs to retail brokerages.

In my opinion, it is about time this was addressed, largely on the basis that execution quality has been the priority of financial markets regulators, brokerages with B2B relationships with their prime of prime providers, and retail customers alike, to the point where slippage, requotes, rejections and non-instantaneous trade closing have become absolutely unacceptable.

I have said before, on different occasions, that whilst retail FX brokerages and the prime of prime brokers that supply them with aggregated liquidity are absolutely bound by contract (even more so when MiFID II is invoked and makes them stick religiously to the specific execution type that they are registered to conduct) to provide absolutely transparent and timely execution, banks are allowed to decide whether to reject trades, placing the onus back on the liquidity taker to process it and ensure that they not only mitigate risk, but ensure the client orders are filled so that nobody does their stack at the user end.

As reported by FinanceFeeds yesterday, Alpari’s US division claims that from January 1, 2008 to June 30, 2016, Citigroup “used Last Look to reject millions of trades that would have been otherwise executed but for Citigroup reneging on its matched orders”.

Absolutely it did, and still does, as defined in the bank’s terms and conditions. This is common practice and would, in the OTC world, be considered a matter for litigation against brokers by clients and regulators alike. Indeed, retail companies have had their licenses removed and businesses wound up for lesser interference with trade execution.

Last look is a term which refers to a facility within trade execution in which banks (or non bank electronic communication networks) can pull out of trades at the last moment if the market moves against them.

For several years, this practice has been considered controversial, and central banks across the world are relatively averse to its existence, yet it continues to be part of the overall topography of institutional electronic trading at Tier 1 bank level, thus by its very standing at the very top of the trade pricing and execution structure, is a practice which filters down by default and affects all components via aggregated liquidity feeds and eventually to retail brokerages.

In May 2015, BATS Global Markets, which operates institutional multi-asset platforms and now owns major institutional ECN Hotspot FX having bought it from KCG for $365 million, began to curb the practice over a course of several weeks, placing limits on how many ‘last look’ orders could be executed in order to take its own step in increasing transparency in the non-bank FX market.

Admirable indeed, perhaps. However, although certain measures such as this have been taken by large institutional firms, EBS, the electronic brokerage division of British interdealer broker ICAP, having gone a stage further in February this year by implementing a policy which aimed to abolish the need for last look execution altogether with the launch of the firm’s new EBS Live Ultra price feed which streams real-time market data from EBS Live which is operated by the firms EBS Broker Tec division, last look is alive and well at bank level.

Whilst not a mandatory implementation, EBS stated at the time that it took this action as a result of feedback and demand from corporate clients.

This is indeed all very well, however major banks are creating a double edged sword with regard to execution and provision of Tier 1 liquidity.

On one hand, banks have become extremely cautious with regard to extending credit to prime brokerages in order to provide aggregated liquidity feeds to the OTC derivatives market, Citigroup, the largest FX dealer by volume in the world with over 16% of all global FX order flow being handled from its Canary Wharf office, stated last year that it predicts a 56% potential default rate from OTC derivatives participants on counterparty credit, yet on the other hand, the very same banks are picking and choosing which trades to exit if the market moves against them, to the detriment of brokerages and liquidity providers globally.

The Financial Conduct Authority (FCA) which presides over the world’s largest institutional and retail center – London – last year conucted its own review into the supervision and transparency of some markets, including the FX market. The FCA’s Fair and Effective Markets Review, or FEMR, specifically asked asset managers and other bank clients about their views on last look.

While some foreign-exchange platforms already don’t permit last look, it is still allowed on some large venues, including the aforementioned BATS-owned Hotspot FX, as well as FXall, owned by Thomson Reuters. Hotspot and FXall account for about 25% of clients’ electronic FX trading, according to financial services industry consultants Greenwich Associates.

Barclays is one of the world’s most prominent proponents of the last look execution procedure, its BARX platform which provides FX liquidity by streaming indicative prices on an in house and third party platform basis.

Barclays’ corporate standpoint on the reasons why it uses last look methodology is that being one of the world’s largest interbank FX dealers, it does not generally seek to reject trade requests. However, electronic spot FX market-making is a highly competitive industry and for the reasons set out above it necessarily exposes the liquidity provider to the risk of trading on incorrect pricing.

Barclays maintains that last look functionality is used to protect against these risks and allows liquidity providers to show considerably tighter electronically streamed prices than they otherwise could – something that the bank considers beneficial to every user of electronic FX trading platforms.

All credit to Alpari US, Barclays’ BARX platform is also implicated in its law suit against those who engage in last look practice.

Beneficial to who? That is the question.

In January 2016, the Foreign Exchange Professionals Association (FXPA), held a webinar on examining the implications of last look for the FX markets.

Attorneys with Steptoe & Johnson on the ‘last look’ webinar, advised market makers to be more transparent about how their last look systems operate.

“Regulators take a very dim view of institutional practices that emphasize a lack of transparency and that encourage employees to give either misdirection or less than complete information to counterparties when direct questions are asked,” said Mike Miller, litigation partner at Steptoe & Johnson, who spoke during the webinar.

All they could do, however, was advise. Fancy fighting the banks as a large, London-based attorney? No, didn’t think so.

In one high-profile case, a global bank used its spot FX trading platform to reject unprofitable trades. When customers asked why the trades were rejected, the bank reportedly gave “vague or misleading answers,” said Steptoe partner Jason Weinstein who analyzed the case during the webinar.

After a regulatory settlement, the bank posted detailed disclosures on its web site and also paid a steep fine, setting a precedent that could impact other banks, brokers and market-making firms.

This forerunning status and ‘last look’ adamancy landed Barclays with a $150m fine from the New York Department of Financial Services at the end of 2015 for abusing its last look execution facilities within its FX trading desk, contributing to further officials having doubts over the way the market polices itself. Let’s hope that this matter is raised as a legal precedent in the Alpari US case.

A review of the fairness of wholesale markets this year by the Bank of England questioned the practice by which market makers get a final opportunity lasting a few milliseconds to reject an order after a client commits to a trade at a quoted price. Unable to decide, the BoE called for further study on “whether it should remain an acceptable market practice”.

Suspicions deepened after Barclays allegedly used its own FX platform to reject unprofitable trades and lied to clients about the reasons. A senior Barclays executive told staffers to “just obfuscate and stonewall” when the sales teams asked questions, and subsequently this issue has focused attention on the inner workings of the highly electronic FX market. Spreads in prices of the most popular currency pairs are so tight they are quoted to at least four decimal places, and because it is bank dominated, the market lacks a centralised place to discover prices, so trading is split between banks and independent venues.

FinanceFeeds has spoken at length with a number of senior executives within the institutional and prime brokerage sector recently, many of which have openly stated that banks do not like firms that offer ‘no last look’ execution, despite the regulatory and government derision aimed at the practice.

Yesterday, in the City of London, I met NatWest Markets, a division of RBS which operates its Tier 1 prime brokerage and has become a very popular source of Tier 1 liquidity for prime of primes in London recently, largely due to its less draconian stance with regard to OTC derivatives.

I am aware of several new agreements having been put in place, with the due diligence having being stringent but sensible. When asking NatWest Markets’ senior executives yesterday at the RBS head office at 250 Bishopsgate whether this was the case, the answer was a pragmatic yes, and an explanation that new OTC companies are welcome. We will be exploring this further on an ongoing basis with NatWest Markets during the next few months here in London.


There are examples of dissent against last look which have manifested themselves in the very modus operandi of OTC firms. British multilateral trading facility (MTF) for FX, LMAX, has been a fish swimming against that tide since its launch over six years ago. The company offers no last look execution, and its CEO, David Mercer, is often outspoken with regard to this being a method of increasing transparency in execution.

LMAX does not have the lion’s share of the institutional liquidity provision to retail firms, however Mr. Mercer is a vocal proponent of the firm’s ideology with regard to execution.


The banks, however, cannot have it both ways!

Considering this practice, and the lack of extension of credit which means that to get a prime which would have required only $5 million just 5 years ago yet requires in some cases between $50 and $100 million today, the banks are making themselves an obstacle in the provision of their very own liquidity.

Such a difficult bank environment has forced the technology innovators and specialist integration and liquidity management system developers to develop solutions which provide greater prime of prime relationships in order to resolve this matter at one step lower down the execution chain than the banks.

In May last year, FinanceFeeds spoke to Andrew Ralich, CEO of oneZero, who explained how he envisages the new ‘ecosystem model’ which drives execution costs down to $1 per million.

“In January of this year, we delivered our Margin Hub solution to the industry. This allowed brokers utilizing oneZero’s connectivity for Retail Platforms to offer API based liquidity to other brokers, with all the tools needed to manage pre-trade risk and post-trade reporting.” said Mr. Ralich.

As far as functionality is concerned, the oneZero Margin Hub solution now combines three components in order to provide services as a retail-facing and B2B clearing counterparty in the OTC FX industry, and is able to provide such connectivity to retail platforms such as MetaTrader 4 and cTrader. Previously, connectivity solutions available to FX brokers generally provided only one of these options, and the combination of both an institutional platform and enterprise quality Bridging solution have become cost-prohibitive in today’s credit market.

Want to execute at $1 per million? Here’s how!

“The uptake of our Margin Hub solution has been a very exciting aspect of Q1 2016 here at oneZero. We’ve onboarded nearly a dozen firms to our ecosystem who can now provide liquidity to other brokers. We find that, when two oneZero brokers connect together there are significant synergistic benefits to both oneZero and our clients.

We want to pass this savings down to the broker, and are now launching a campaign where oneZero clients who Bridge to oneZero Margin Hub users will be able to reduce their technology fees to $1 per million. We feel this is an unprecedented and disruptive move in terms of the traditional pricing structure for enterprise Bridging solutions” – Andrew Ralich, CEO, oneZero

Providers in the FX clearing vertical have seen similar “ecosystem” style pricing models in the past, but never before have brokers been able to extend such an ecosystem from an aggregated, Tier 1 margin-capable solution all the way down to MT4 bridging.

Though this trend is new to FX, it has proven precedence in other financial markets

Since the adoption of third party technology which has adapted the MetaTrader platforms (4 and 5) to connect to aggregated liquidity feeds, many brokers now seek to onboard sophisticated retail traders with direct market access and very fast execution, however it is still a yardstick short of the institutional model used in both Wall Street (New York) and State Street (Chicago).

Yes, exchange listed derivatives are expensive to clear, because the market maker has to become a clearing member, which usually has two costs – membership fees which are upwards of $500,000 per year, and clearing costs which are several hundred thousands of dollars per month depending on volume.

There are very few retail OTC prime brokerage firms that are absolutely not exposed to any risk if every trade is sent directly to market. Even the major banks which handle the vast majority of interbank FX order flow have now moved away from this model altogether – for example, Citigroup, the world’s largest interbank FX dealer, exited the retail sector altogether by offloading CitiFX Pro, its retail prime brokerage division, just 3 months after the SNB event.

That particular event has resulted in a number of changes to the OTC FX industry, however most of them have been cautionary. It would take a very innovative disruptor of technology to bring something revolutionary into the sector in order to address this and still progress in an onward direction.

Just yesterday, David Mercer, CEO of LMAX explained to FinanceFeeds last year ”We’ve engaged with the UK’s Financial Conduct Authority, the Bank of International Settlements (known as the central banks’ central bank), the Bank of England about the Fair and Effective Markets Review (FEMR), and the New York Fed, and they definitely hear but they don’t listen. It’s disappointing,” said Mercer.

“The biggest [area] for abuse in the FX market is ‘last look’ and the lack of transparency of who is trading with whom since most of of FX is done trading over-the-counter (OTC). The regulators are just papering over the cracks of a broken mechanism that is open to abuse.”

In a LMAX Exchange survey of 1,100 FX market participants, it says that “trust has not been restored and transparency is yet to improve” because “65% of respondents said their interests are not sufficiently protected.”

The noise continues, of course, and with such a protracted discourse at very senior level, demonstrates that once again, it is the banks that are in charge.

Let’s hope Alpari US’s litigation sets a precedent and that at least it forges the path ahead which stops the conflict of interest between the banks and the OTC firms that rely on just a handful of them for liquidity in an almost monopolistic market.

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