Fast LPs accuse rivals of maxing out last look response times

Firms with sub-10ms checks complain of losing volumes to slower rivals, prompting one to ditch ECNs

Despite recent attempts by some spot FX trading venues to crack down on last look practices, some liquidity providers running tight windows have reported losing volumes as a result – and at least one market-maker has consequently unplugged from anonymous venues.

With the FX Global Code banning additional hold times from being incorporated into last look on anonymous and semi-anonymous venues, an increasing number of FX trading venues have either required users to be compliant with the code or imposed maximum response times.

But some liquidity providers that have tight last look windows – where they have zero additional hold times and the fastest possible last look checks of below 10 milliseconds – claim many rivals are still using the platforms’ full maximum response time despite possessing the technology to go faster. These firms say they say are losing volumes and revenues, and at least one non-bank LP has stopped offering liquidity on anonymous electronic communications networks (ECNs) as a result.

“When you trade on an anonymous basis, you are relying on the ECN to ensure execution quality. We don’t want to rely on the ECN for anything, which is why we now trade on a disclosed and semi-disclosed basis, and we take liquidity on that basis. We do understand that, as a semi-disclosed participant, we might also be interacting against anonymous venues, but at least we can speak directly to our counterpart about the things that are important to us,” says an FX trader from a non-bank liquidity provider.

Last look is broadly comprised of two elements: a price validity check and a credit check. If the price moves too far from the agreed level during the window, it can be rejected by the liquidity provider. However, many liquidity providers have historically placed an additional hold time of as much as 300ms on top of these checks to monitor client behaviour.

We don’t feel comfortable with the policing around what market-makers do

FX trader at a non-bank liquidity provider

LPs argued they needed to do this to guard against so-called toxic flow – for instance, a high-frequency trader that only trades on stale prices, or who sprays an order across the market, prompting multiple dealers to hedge simultaneously and move the market. But critics countered that such hold times lead to a disproportionate number of rejected trades and mean clients end up with worse pricing when they resubmit the trade.

The original 2017 version of the FX Global Code encouraged transparency around the practice, but a revised version in 2021 – hammered home by statements from then-GFXC chair Guy Debelle – made clear that the use of additional hold times was against the spirit of the guidelines. Hold times have slowly disappeared from disclosures since then. Most LPs now simply state what their maximum last look window is, which can range from as low as 0.6ms at Crédit Agricole to as long as 500ms at BBVA. Others are much less explicit about their response times.

But some firms that operate with near-zero last look windows claim rivals are now simply hiding what used to be additional hold times in their overall last look response window. In other words, an LP might be able to complete a credit and price check in 10ms but will state that the overall last look window is far longer, bringing back its additional hold time in all but name.

In a bid to tackle the practice, a number of platforms required users to adhere to the FX Global Code. Some went further, such as Cboe FX – formerly Hotspot – which set a 35ms maximum response time in March last year, while 360TGTX has a maximum response time of 100ms.

Speaking to FX Markets at the time of the move, Cboe FX said this was an “appropriate time” to bring down its response time, reducing the hold time that an LP could apply and thereby improving execution quality.

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However, some firms still say rival market-makers are deliberately taking the whole allowable period when they don’t necessarily need to.

“We don’t feel comfortable with the policing around what market-makers do. The code has made it clear [about additional hold times], however it is also apparent that the hold times are not down to zero on ECNs,” says the FX trader at the non-bank LP.

“We’re between a rock and a hard place with the ECNs. It’s very unclear why it’s not a lot closer to zero – it’s very frustrating,” he adds.

A spokesperson for Cboe says: “As of April 1, 2023, all Cboe FX liquidity providers must be code-compliant. Cboe FX has had a systematically enforced hold time for many years, which is reviewed periodically.”

Christian Lønborg Thomsen, eFX trading and liquidity manager at Saxo Bank, says he has seen LPs consistently take the maximum allowable response time when consuming liquidity.

“We have our own environment of market-maker feeds that we use for our [liquidity taking] purposes. If we provide a [maximum response time] figure, then the LPs will take that time. So, we lowered the allowed response times on our side, and you see some of the bigger market-makers still take that entire time to use as a max to respond,” says Thomsen.

The head of FX at a second non-bank LP, which runs sub-10ms last look windows, says this behaviour disadvantages the firm and has caused it to lose volumes on anonymous venues. He says LPs taking the maximum time allowed by a venue secure a longer period in which to observe market movements and potentially reject loss-making trades, meaning they can price tighter spreads and win more business.

However, he believes the kudos that comes from being regarded as a good FX market citizen could make up for the decline in volumes.

Saxo Bank’s Thomsen agrees that the situation can be uneven for LPs that run zero hold times and short last look windows but says trading venues have helped to improve matters.

“For some bank and non-bank LPs with declared zero hold times, they stick to those. So that does create a partly unfair environment, where the aim is for everyone to compete on equal grounds. I would say, though, that the response times have just come down to a level where this super unfair competition has sort of gone away, and that’s been driven by the venues,” he says. “What we hear from some of the zero-hold-time LPs is they don’t really struggle as much as they did in the past, when we had 100ms or even 300ms back in the day.”

 

Update, May 30, 2023: The original version of this story stated incorrectly that 360TGTX’s maximum response time was 250ms. The article has been amended.