(Bloomberg) — BlackRock Inc. said currency traders should be prevented from taking a last look before executing orders — a practice New Yorks banking regulator is investigating.
The custom, which is unique to foreign-exchange markets and gives traders a chance to back out of executing an order, is a flaw in the structure of the market, according to the worlds biggest investor.
Last looks can cause market participants to experience so- called phantom liquidity where prices that appear to be available suddenly disappear, the asset manager said in a response to the Bank of Englands Fair and Effective Markets Review published on Tuesday.
Our preference in the FX market would be to a view on the liquidity in which we can deal, even if this comes at a higher cost compared to the phantom liquidity, BlackRock said. Moving away from indications of interest to streaming firm prices would be fully consistent, we believe, with outcomes that are both fairer and more effective.
Benjamin Lawsky, the head of the New York Department of Financial Services, said Feb. 12 that his agencys probe of electronic currency trading focuses in part on the practice.
Last look is a leftover from the dawn of computerized currency trading. In those days, there was a time lag between when an order was typed and when it was executed, creating a risk that prices would move and hurt the bank before the transaction was complete.
That time lag has long since narrowed, but the banks that dominate the $5.3 trillion-a-day foreign-exchange market have retained the right to review their trades before executing them.
Credit Quality
Unlike the stock market, currency trading doesnt take place on central exchanges. Its considered opaque partly because dealers arent required to give their customers the best available prices. They can offer different prices for the same trade depending on the customers credit quality, sophistication or relationship with the bank.
Making available and completed trades more transparent would make the market fairer, BlackRock said. It would help investors discover available liquidity and enable them to ensure they were getting a good deal, said the New York-based firm, whose response to the BOEs review was originally released last month.
These developments, would in our view, facilitate fairer outcomes for end investors and increase market effectiveness and efficiency, BlackRock said.