‘Last look’ not yet on last legs even as CLOB activity spikes

The link between major political and economic events and increased use of central limit order books (CLOB) is well established and was underlined by client reaction to upheavals during 2016.

More recently, EBS Market reported a spike in activity on March 1 in response to significant moves in the Singapore dollar.

“The increase in central limit order book activity in the early part of the year can be attributed directly to the heightened bouts of volatility we have seen, but this uptick has been noted across the board – direct liquidity providers have been benefiting to the same extent,” says Greg Niebank, group head of product at CMC Markets.

Activity on Thomson Reuters’ matching venue during the past few months has been no more than in line with typical seasonal patterns, according to head of FX trading venues Paul Clarke, although he does refer to a connection between demand for firm, all-to-all liquidity and reduced use of last look.

“Some of the feedback from clients is that faster data from the central limit order book can help to reduce the need for last look as there are more trading options for clients and more frequent data for liquidity providers,” says Clarke.

Last look, in which a market maker gets a brief chance – often milliseconds – to reject an order, has been under public scrutiny in recent years as it gives market makers the opportunity to reject trades simply because they are unprofitable, distorting market prices.

Many expected that increased use of CLOB would force participants to migrate away from the practice.

Tim Cartledge, global head of FX at EBS BrokerTec, agrees that improved data speed has a positive impact on the market’s reliance on practices such as last look, but he adds that market participants choose different trading venues according to need and that not all activity is executed via CLOB. 

There has been a notable reduction in the use of last look, but this isn’t necessarily being driven by CLOB. That is the view of CMC’s Niebank, who notes that direct liquidity providers are well aware that migration from voice trading to electronic trading means last look no longer has the same relevance.

“Some liquidity providers may still argue its merits, but these are increasingly difficult to justify,” he says. “So a failure to curtail the use of last look risks regulators simply banning the practice.

“Additionally, by reducing the use of last look, direct liquidity providers want to show the market that there is no real benefit of moving to a central limit order book anyway.”

Niebank also observes that the one-size-fits-all approach to pricing concerns larger players who want to be able to retain previous goodwill arrangements with direct liquidity providers.

Thomson Reuters’ Clarke suggests it is not clear to what extent all-to-all platforms have convinced market participants that order books provide cheaper execution, noting that for any market participant, cost of execution depends on their trading style and objectives.

“However, since we launched iceberg order types we have seen quick growth in both manual and algorithmic volumes where participants want to trade in size – and if they need to execute quickly, central limit order books provide the confidence that participants can trade volume since there is no last look,” he adds.

The platform approach appeals to an increasing number of clients who wish to access more liquidity to build a robust execution policy, says Andy Woolmer, managing director of New Change FX.

“The platform allows for different execution techniques to be looked at as well as giving access to a wider selection of counterparts,” he adds. “Alongside these benefits, users also have to start considering issues such as information leakage cost, likelihood of being filled and market impact cost.”

Feedback from clients indicates they no longer want to just cross the spread – they want to be a bid or offer so they can passively execute, which requires a CLOB, says Cartledge at EBS.

“Cost is not the only consideration though,” he adds. “We have provided a range of trading venues so that clients can choose how they want to connect and execute.”

Niebank suggests platforms are a considerable distance away from convincing market participants of the execution merits of order books, adding that the vast majority of market participants appreciate the flexible offering they can get from their direct liquidity providers.

“This means that the central limit order books simply don’t have a suitably compelling proposition to attract new business,” he concludes. “The prospect of greater transparency is not sufficient to outweigh the premium pricing and lack of flexibility.

“Ultimately, it would seem that moving more activity from direct liquidity providers to central limit order books is going to be a function of regulation, not market forces.”