Came across an old (November 2015) Bloomberg article on Barclays’ Last Look functionality in their electronic FX trading system.
While there have been lots of complaints from retail FX traders that their orders would run into “technical difficulties” once their trades become too profitable, the article confirms that institutional traders have the same issues when trading with the investment banks.
Barclays’ Right of Order Refusal
In Barclays’ electronic FX trading system (BARX), especially for customers that connect to them through API/FIX, Barclays have implemented a “Last Look” functionality: Even though Barclays posts bid/offer prices, after receiving a customer’s order, it gets to wait a short while, see how the market moves, before deciding whether to take the order or reject the order with a Not Acknowledged (NACK) message.
Barclays justified the Last Look functionality as a counter-measure against latency arbitrage, i.e. Barclays’ data and systems might be slower than its customers’, so it’s customers might trade against Barclays knowing ahead of Barclays that the market has moved, so Barclays needs to hold the order, wait for its systems to catch up, before deciding whether or not to accept the trade.
To Customers: Just Obfuscate and Stonewall
Of course, any trading system that allows one to peer into the future and reject unprofitable trades is just ripe for abuse. For the unlucky customers that questioned Barclays on their NACKs, Barclays Managing Director and Head of Automated Electronic FX Trading had the following advice: “If you get enquiries just obfuscate and stonewall.”
Regulator: Keep the System, Just Make It Symmetrical
The New York Department of Financial Services eventually found out and fined Barclays $150m. The interesting bit is, the regulator did not object to Barclays need for a Last Look functionality. Where it found fault was that the implementation rejected orders that are very unprofitable for Barclays, while accepting orders that are very profitable. It is fine so long as Barclays made the treatment symmetrical, i.e. orders that are very profitable should also be rejected.
And as you might expect, Barclays rolled out a “buggy” system that allowed part of its trading volume to continue having the same flaw for a year after the judgment. I suppose it helped to smoothen the financial impact.