IA POSITION PAPER ON LAST LOOK

Transcription

1 IA POSITION PAPER ON LAST LOOK The Investment Assciatin ( the IA ) represents UK investment managers and has ver 220 members wh cllectively manage mre than 6.9 trillin f behalf f clients in the UK and arund the wrld. The IA is keen t ensure that FX markets are fair and effective, which ultimately benefits ur members and their end clients, and helps investment managers t maximise their cntributin t ecnmic grwth. The practice f Last Lk whereby a Market Participant receiving a trade request has a final pprtunity t accept r reject the request against its quted price has received cnsiderable industry and press attentin in recent mnths. There are cncerns that the use f Last Lk prvides dealers with a significant infrmatin advantage and disadvantages client executin. Last Lk may have valid applicatins in rder t prtect Market Participants frm taking n t much risk. Investrs als nte that nt Last Lking is nt necessarily an indicatin f gd behaviur r quality f executin in and f itself. Fr example, sme HFTs (r banks) culd use pls which have n Last Lk t rapidly manage their risk ahead f less speedy market participants. Such behaviur culd ptentially create mre market impact than therwise. Nnetheless there remain cncerns abut the way in which Last Lk is smetimes applied, particularly with regard t: Last Lk plicy and prcess transparency; Unacceptable practices; Data disclsures and timestamps The Investment Assciatin has therefre develped a psitin paper n the use f Last Lk, setting ut recmmendatins fr hw these cncerns may be best addressed by liquidity prviders and venues.

2 GUIDELINES FOR LIQUIDITY PROVIDERS ( LPS ) GENERAL POLICY & INTERNAL PROCESSES Investrs are cncerned abut the lack f transparency arund the use f Last Lk. The extent t which Last Lk practices may be used may vary depending n LPs internal plicy and prcesses. T help understand LPs use f Last Lk and t prvide a fair cmparisn, investrs wuld value greater transparency n LPs general last lk plicy and prcedures. IA Recmmendatin: LPs t prvide each client with a clear internal definitin f last lk and prcess f use. This shuld be prvided annually, and at any pint where changes t the Last Lk plicy are made. Investrs understand that different LPs will have different Last Lk price tlerances. In rder t aid fair cmparisn, banks shuld make investrs aware f the Last Lk price tlerance f rders. This shuld be made clear upfrnt in the terms f business. DISCLOSURE ON SPECIFIC TRADES - STANDARD REASON CODES Buy-side firms are ften unclear as t when their individual trades have been rejected as a result f the applicatin f Last Lk, and why Last Lk has been applied. This makes it difficult t assess the impact f Last Lk n executin. IA Recmmendatin: The IA cnsiders that the LP shuld frmally infrm clients when Last Lk is applied n a trade, and explain why the trade has been rejected, drawing frm a standard set f reasns, namely: Price tlerance, in rder t prtect the liquidity prvider Price imprvement fr the client. This shuld be discussed and agreed with the client as nt all clients may be able t technlgically accept price imprvement. Internal Credit Checks/Breaches Latency This infrmatin shuld be passed t the venue in real-time, in rder that the user may mre easily analyse this infrmatin acrss all LPs. 2 f 5

3 UNACCEPTABLE PRACTICES Infrmatin leakage is pssible, and ptentially prevalent, in LPs where electrnic traders and vice traders can see the electrnic trades and Alg rders. This applies nt nly t filled rders r rders passed t the market, but als n rders which are rejected either by the LP r at the venue. Due t the lack f transparency and ptential fr misuse f infrmatin leakage, there are sme specific instances in which the IA cnsiders that the use f Last Lk is unacceptable. These include: Pre-hedging during the Last Lk windw. Trading activity based n the infrmatin derived frm rejected trades Trading activity based n infrmatin derived frm RFQs which are in prgress r thse that are nt wn IA Recmmendatin: All LP s shuld make a statement directly t clients t the effect that they d nt engage in any f these practices. This shuld be made clear upfrnt in the terms f business. A mdel fr such a statement can be fund belw "Where last lk applies, XXXXX [nr any subsidiary*] is nt active in the market during the last lk windw in relatin t yur trade request. Further, if yur trade request is rejected, XXXXX is nt active in the market after the last lk windw in relatin t yur rejected trade request. XXXX is nly active in the market in relatin t yur trade request after it has been accepted." VENUES The venues play a crucial rle in understanding sme parts f their participants' behaviur. They shuld accept sme respnsibility fr plicing the behaviur and whilst they cannt versee activity acrss markets they can play a part in ffering pls f liquidity frm prviders whse service matches what IA members regard as best practice, such as thse prviders making the disclsures described abve. IA Recmmendatin: In rder t aid investrs, venues shuld sign up t the Glbal Cde f Cnduct, and shuld make their Last Lk plicies available t clients. Investrs nte that in many cases even where a venue might sign up t the Cde nt all f the LPs using the venue will d the same. Therefre it is imprtant fr investrs t knw whether a venue requires LPs using it t sign up t the Cde. DATA DISCLOSURES AND TIME-STAMPING T prperly examine Last Lk, and the impact it has n investment managers and their clients, buyside institutins need t be able t measure its use. As part f this, members need time stamps, accurate t the millisecnd, and ther disclsures. 3 f 5

4 IA Recmmendatin: At a base case minimum, all trades shuld include data and accurate time-stamping fr the fllwing: CCY Pair CCY bught/sld Amunt bught/sld Directin (buy r sell) Price Prduct (e.g. spt, FWD, FX Swap, NDF) Submitted by the Buy Side firm Received by the LP Rejected by the LP Cmpleted by the LP Ideally hwever disclsures wuld g further. The fllwing data shuld be available frm the executing bank. We wuld als encurage multi-bank platfrms t stre and prvide this data, which, in additin t the abve, wuld als include: Venue (The ECN upn which the rder was filled e.g. EBS) When the rder was passed t the 3 rd party surce f liquidity When the rder was received by the 3 rd party When the rder was rejected (and reasn cde) by the 3 rd party PM Order Inceptin (Time rder is riginated by the prtfli manager in a standardised) Desk Arrival (Time rder arrives at the executin desk) Market Arrival (Time rder is submitted fr executin) Strategy (Categry Type fr Algs) Alg Name (Specific Name f Alg) Alg Style (Categry Executin Style fr Algs e.g. Passive) Limit (Limit price f an Alg if available) Executin Type Executin Style fr Alg child slices (e.g. Passive) Trade Type (Methd f executin e.g. Vice) Channel (The platfrm ver which the trade was executed, e.g. FXAll) 4 f 5

5 Channel (The platfrm ver which the trade was executed, e.g. FXAll) Cunterparty (Executing cunterparty r brker) Prtfli (Identifier fr prtfli r accunt frm which the trade riginated) Trader (Trader respnsible fr the trade) Manager (Manager f the prtfli being traded) Desk (Investment Desk managing the trade) Value Date (Maturity date fr the Frward r Swap trade) Frward Pints (Frward pints in basis pints) Frward Rate (Frward Rate) Order ID (Unique ID fr the rder) Parent Order ID (Unique ID fr the parent rder) Client Order ID (Unique ID fr the rder that the client assciates with) Ntes (Custm cmments assciated with the trade) ALGOS CHILD ORDER VISIBILITY A child rder ccurs when an algrithm breaks ne r mre large rders ( parent rders ) int a series f smaller trades. Algs traditinally have lw levels f transparency as t hw child rders are handled fr example, if they are being cmpleted, r if they have been Last Lked. Imprved transparency is vital in helping t allw members t cnduct lng term analysis n the perfrmance f LPs and venues as: Withut it, whilst a member may be able t judge the cst versus arrival price r expected cst, it may nt allw the member t see what they are paying away n individual rders Overall perfrmance may lk gd versus an expected benchmark but this may mask csts that are being lst in individual executins There are cncerns abut signalling risk and infrmatin leakage during the Last Lk windw. Only with this infrmatin can members determine the full cst f Last Lk, as at least as much ptential value is lst n rejected rders as n filled rders. IA Recmmendatin: It is hugely imprtant t have all child rder details, including rejected rders as well as fills, delivered as part f the data and time-stamping disclsures requested abve. 5 f 5