Anonymous venues could do more on last look

Guy Debelle might not feel they needed saying, but the chair of the Global Foreign Exchange Committee’s comments in October clarifying the committee’s stance that last look should not include additional hold times really did make an impact.

Many FX spot liquidity providers have been looking for ways to keep applying hold times, which they argue helps them weed out toxic trading behaviour and ultimately gives them more confidence to quote tight prices to good clients. However, others argue such hold times can be misused for profit-making purposes. 

Debelle’s comments have made a profiteering stance on last look pretty hard to maintain. With FX liquidity providers now reviewing their last look practices in light of what he said, Debelle has also opened up the debate on the role that anonymous platforms should be playing to remove additional hold times across their venues. 

Some LPs operate a zero-hold-time last look on disclosed venues, but many retain a hold time when trading on anonymous platforms due to the uncertainty of who they’re sharing a liquidity pool with. An LP wishing to scrap its anonymous hold time might be fearful of doing so because it suspects everyone else in the pool is applying a hold time – meaning competitors might be able to post tighter prices. And as is often the case on anonymous platforms, the tightest price wins. 

Anonymous venues also don’t typically police the use of additional hold times in the market. Instead, many ECNs only set maximum response times – that is, the time it takes between the acceptance of the order and execution. Some allowed response times from ECNs can be long as 300 milliseconds, meaning an LP on that platform could conduct its last look check in 50ms, but apply a 250ms hold time. While that hold time would be fine in the eyes of the ECN, it clearly goes against the spirit of Debelle’s comments.  

While the likes of XTX, Flow Traders and Citadel Securities have the confidence to move to zero hold time on anonymous venues, not everyone has the confidence to follow suit. For some, anonymous platforms should be doing more to promote the elimination of additional hold times.

For example, while venues can’t know exactly what proportion of their allowed max response time an LP is using to apply additional hold times, they could shorten that time as a way to at least reduce the possible length of hold times being applied – levelling the playing field. 

Response times can’t go to zero, as not every LP has the technology to complete their price and credit checks in that time. But platforms like Cboe FX – which has a maximum response time of 70ms – show that its certainly possible for those times to be tightened. 

If they can, more venues should play their part and reduce their maximum response time – lest ECNs be a place where additional hold times can cling on in the shadows.