Bloomberg article for all of you trading with ECN brokers.
By Greg Farrell
(Bloomberg) -- The Justice Department has begun looking into a common practice in foreign-exchange markets that allows banks to back out of unfavorable trades at the last moment, a person briefed on the matter said.
Prosecutors, along with the Securities and Exchange Commission, have asked Barclays Plc for information related to its electronic-trading platform, which contains a program that allows traders to take a “last look” at an order before executing it, according to the person, who asked not to be named because the matter isn’t public.
Prosecutors’ interest in the last-look practice has grown out of a broader investigation into the manipulation of benchmarks and client orders in the $5.3 trillion-a-day currency market. The inquiries follow an investigative path laid out in recent months by Benjamin Lawsky, New York’s banking regulator.
Barclays said earlier Tuesday that it set aside an additional 750 million pounds ($1.2 billion) to cover the cost of settling the currency-rigging investigation, bringing its total expected cost to about 1.25 billion pounds.
Vestige Practice
The last-look option is a vestige of the early computer era when the time lag between an order being entered at one bank and confirmed at another was long enough to expose the market maker to unpredictable price fluctuations. As that lag tightened, banks retained the right to halt currency trades on a last-look basis.
Critics of the practice say it’s obsolete and can harm investors.
“Last look is a hangover from a technology problem that no longer exists, yet still allows traders to reject trades and re-quote orders to the disadvantage of clients,” David Mercer, chief executive of LMAX Exchange, a forex trading platform that competes with the major banks, said in a Feb. 20 statement.
BlackRock Inc. said last month that last looks can cause market participants to experience so-called phantom liquidity where prices that appear to be available suddenly disappear, in response to the Bank of England’s Fair and Effective Markets Review. Making completed trades available and transparent would make the market better, BlackRock said.
“These developments, would in our view, facilitate fairer outcomes for end investors and increase market effectiveness and efficiency,” BlackRock said.
New Front
It isn’t clear whether the Justice Department’s review of last-look practices will lead to a new front in its forex investigation. The SEC is exploring whether any elements of the practice violate disclosure laws, another person briefed on the matter said.
Peter Carr, a Justice Department spokesman, declined to comment on any inquiry specifically into last-look practices, as did Florence Harmon of the SEC.
Until now, regulators in the U.K., Switzerland and the U.S. have been primarily focused on manipulation of benchmark currency exchange rates by traders at some 30 global banks, with an emphasis on collusive behavior. The last-look review indicates that regulators and prosecutors are turning their focus to established practices that could make markets unfair.
The prosecutors’ request appears to bolster a line of inquiry opened up by Lawsky, superintendent of New York’s Department of Financial Services, who said last month that he was looking into the practice.
In its annual report released Tuesday, Barclays said that various “regulatory and enforcement authorities,” including the Justice Department, SEC and Lawsky’s agency, “are investigating a range of issues associated with Foreign Exchange sales and trading, including electronic trading.” Kerrie Cohen, a spokeswoman for Barclays, declined to comment.
By Greg Farrell
(Bloomberg) -- The Justice Department has begun looking into a common practice in foreign-exchange markets that allows banks to back out of unfavorable trades at the last moment, a person briefed on the matter said.
Prosecutors, along with the Securities and Exchange Commission, have asked Barclays Plc for information related to its electronic-trading platform, which contains a program that allows traders to take a “last look” at an order before executing it, according to the person, who asked not to be named because the matter isn’t public.
Prosecutors’ interest in the last-look practice has grown out of a broader investigation into the manipulation of benchmarks and client orders in the $5.3 trillion-a-day currency market. The inquiries follow an investigative path laid out in recent months by Benjamin Lawsky, New York’s banking regulator.
Barclays said earlier Tuesday that it set aside an additional 750 million pounds ($1.2 billion) to cover the cost of settling the currency-rigging investigation, bringing its total expected cost to about 1.25 billion pounds.
Vestige Practice
The last-look option is a vestige of the early computer era when the time lag between an order being entered at one bank and confirmed at another was long enough to expose the market maker to unpredictable price fluctuations. As that lag tightened, banks retained the right to halt currency trades on a last-look basis.
Critics of the practice say it’s obsolete and can harm investors.
“Last look is a hangover from a technology problem that no longer exists, yet still allows traders to reject trades and re-quote orders to the disadvantage of clients,” David Mercer, chief executive of LMAX Exchange, a forex trading platform that competes with the major banks, said in a Feb. 20 statement.
BlackRock Inc. said last month that last looks can cause market participants to experience so-called phantom liquidity where prices that appear to be available suddenly disappear, in response to the Bank of England’s Fair and Effective Markets Review. Making completed trades available and transparent would make the market better, BlackRock said.
“These developments, would in our view, facilitate fairer outcomes for end investors and increase market effectiveness and efficiency,” BlackRock said.
New Front
It isn’t clear whether the Justice Department’s review of last-look practices will lead to a new front in its forex investigation. The SEC is exploring whether any elements of the practice violate disclosure laws, another person briefed on the matter said.
Peter Carr, a Justice Department spokesman, declined to comment on any inquiry specifically into last-look practices, as did Florence Harmon of the SEC.
Until now, regulators in the U.K., Switzerland and the U.S. have been primarily focused on manipulation of benchmark currency exchange rates by traders at some 30 global banks, with an emphasis on collusive behavior. The last-look review indicates that regulators and prosecutors are turning their focus to established practices that could make markets unfair.
The prosecutors’ request appears to bolster a line of inquiry opened up by Lawsky, superintendent of New York’s Department of Financial Services, who said last month that he was looking into the practice.
In its annual report released Tuesday, Barclays said that various “regulatory and enforcement authorities,” including the Justice Department, SEC and Lawsky’s agency, “are investigating a range of issues associated with Foreign Exchange sales and trading, including electronic trading.” Kerrie Cohen, a spokeswoman for Barclays, declined to comment.
