Global FX Code making an impact as ‘last look’ executions diminish

New study from NEX Markets finds a reduction in hold times, reject rates and a tightening of spreads on its EBS Direct trading platform.

The level of foreign exchange (FX) counterparties using the widely controversial ‘last look’ method of execution has fallen since the introduction of the Global FX Code of Coduct, new research suggests.

A report from NEX Markets analysed activity on its bilateral EBS Direct trading platform and found a significant reduction in hold times, reject rates and a tightening of spreads, as the FX industry moves towards greater transparency under the initiative.

Average hold times of the top 10 liquidity providers on EBS Direct have decreased 61% from 93 milliseconds 18 months ago, prior to the introduction of the Global FX Code, to 37 milliseconds today.

NEX Markets stated that the reduction has been driven by Principle 17 of the Code, which was amended in December 2017 to ensure all market participants disclose any activity undertaken in the last look period.  

“Since making this amendment, transparency has increased for liquidity consumers on the other side of a trade who are now able to compare the reject rates of a liquidity provider on a relative basis, effectively creating a framework where sustainable and profitable relationships can be identified more easily,” the report said.

The last look practices provides the opportunity for banks to decline or reject a trade when the market has moved against its position, and has proved to be a point of contention with FX, with the Investment Association slamming the practice as being detrimental to asset managers.

NEX Markets’ study found that since the introduction of the Global FX Code, reject rates across the top 10 liquidity providers have fallen 41% from an average of 5.3% to 3.15%, with more trades being executed at the price originally quoted.

“The symmetry between a reduction in hold times and reject rates over the past 18 months demonstrates that the Code is creating a greater openness and a sea change in behaviour for the better,” said Seth Johnson, CEO of NEX Markets.

“With increased attestation to the principles, combined with the proliferation of data and analytics in the industry, we expect to see a continued improvement in execution quality, better behaviour and greater market transparency.”

With the positive effects laid out from data on EBS Direct and more than 500 firms currently committed to adhering to the Global FX Code, NEX Markets has now called for the thousands of other smaller, mid-sized participants in the FX wholesale market to follow suit and sign up.

“It is critical that all market participants get behind the Code. Central banks have played a crucial role in promoting and ensuring its adoption; now it’s time for liquidity consumers to follow suit,” added Tim Cartledge, global head of FX and head of product at NEX Markets.

“If the FX industry does not take this opportunity, it is highly likely that we will end up with regulations which will be lengthy and expensive to implement. Only with full adherence can we create a fairer and healthier FX trading environment for all.”

For an in-depth analysis of whether firms are choosing to adhere to the Global FX Code one year since it was introduced, please click here.