The debate continues around last look FX pricing and whether the distribution of information is skewed towards the dealers, and away from the customers. Well, yes – it undoubtedly is, and of course that’s the reason the systems are built in that way. I am not saying whether this practice is fair or not, but the contract term “an invitation to treat” is well established in law. It comes from the Latin invitatio ad offerendum and means “inviting an offer. The person (dealer) making that offer does not intend to be bound, as soon as it is accepted. Hence the trade rejections come thick and fast on some systems.
The important part is that users of systems with last look functionality need to know that it is being used, so that the apparent tight spreads and depth of liquidity are not just another mirage in the Foreign Exchange desert.
News that FX traders may have shared information about order flow with large customers is not really news. However, there is a significant difference between sharing information about order flow BEFORE the deal takes place, and reporting it in generic non-specific terms, AFTER it has occurred.
The focus of the investigations is going to shift in 2015, as compliance teams and the various authorities realise that the actions of the FX traders with regard to fixing deals, are just the tip of the massive iceberg that is the foreign exchange market. There are still a number of unanswered questions :
Why do Fund Managers continue to allow their FX business to be done at “benchmark” prices that they KNOW are sub-optimal? When will pension fund holders start to question whether the Fund Managers have fulfilled their fiduciary duties concerning “best execution” ? How do major bank Salespeople differentiate themselves from their competitors in order to “win” business ?
Although we have seen a welcome pick-up in market volatility over the last few months, this might be a year of fears over what will be revealed by the next phase of investigations, and this may continue to cast a shadow over the FX market in 2015.