Usage of the practice of so-called "last look" in foreign currency trading — when a liquidity provider accepts or declines a trade at the last minute — should be limited, according to the Investment Association, a U.K.-based industry group.
The association published guidelines to address concerns regarding the use of last look and identified certain instances where it should not be considered acceptable because of the risk of misuse of information by the liquidity provider.
These include pre-hedging during the last look window; trading based on information relating to rejected trades; and trading based on information from a request for quotation that is in progress or those that are not won.
The trade body, whose members manage £6.9 trillion of assets, has asked liquidity providers — banks and brokers — to clearly define last look and base their reasons for a declined trade, using reasons such as latency, price improvement, internal credit checks and price tolerances. Trades that are declined should also be accompanied by time stamps and other data provided by banks and brokers, the Investment Association said.
Asset managers get little or no information on why individual trades were declined, and why last look was applied by a bank or broker, which affects their assessment of trade execution, the association said.
