Currency traders may not be fast enough, at least when itcomes to cleaning up their image.

At issue is a controversial custom called “last look,” whichallows market makers to back out of a trade. After allegations ofabuse, most major banks have recently taken steps to publiclydisclose their trading standards to clients. But not all are onboard. Top 10 dealer BNP Paribas doesn't. And a big player inhigh-frequency trading called Tower Research Capital says itdoesn't need to.

Industry executives — still reeling from paying billionsin currency-rigging fines — concede that the largelyunregulated $5.1 trillion-a-day foreign-exchange market coulduse a dose of transparency. As part of an effort to policethemselves, traders are hoping a global code of conduct that's duein May will help shore up their reputation before regulators crackdown harder.

“There's a large chunk of the industry that's disheartened bythe scandals and by what's happened to the industry, and wants tomove to a better place,” said Guy Debelle, deputy governor of theReserve Bank of Australia, who is helping develop the code ofconduct. “People do care about the industry and want it to functioneffectively and restore some of its lost reputation.”

Agreement on standards for last look isn't widespread. Towerfounder Mark Gorton said in an email that his proprietary-tradingfirm doesn't buy and sell with counterparties in the way that majorbanks do, so questions about disclosures aren't relevant.

“BNP Paribas is actively participating in developing the FXmarket single code of conduct and fully supports its principles,”Alexandra Umpleby, a spokeswoman for BNP Paribas, said in an email.“It is fully committed to conducting its FX market activities in amanner which is consistent with the code.”

Last look gives a market maker, such as a dealer, time to backout of a trade. Some argue that the practice has merits,allowing market makers to quote better prices. But a firm couldunfairly learn a counterparty's intentions without having tocomplete the transaction. The Bank of England has said the practiceis vulnerable to misuse.

Currencies are traded over-the-counter, making quotes far lesstransparent than those for much of the stock market, and prices canvary for each customer. The Bank for International Settlements hascharacterized the industry as “ suffering from a lack of trust,” acredibility crisis going back to the fixing scandal in 2013.

It was made worse two years later, when clients balked afterdealers tried to walk away from unprofitable trades caused by ashock policy change at the Swiss National Bank. In 2015, BarclaysPlc was fined $150 million for abusing its last-look system — NewYork regulators allege support staff had been barred from admittingthe practice even existed on its platform — and now Deutsche BankAG faces lawsuits.

Voluntary public disclosures are one way of handling that,though the efforts so far are patchy.

JPMorgan Chase & Co. for example has told clients it swearsoff some of the most contentious behaviors including hedging duringthe last look window — potentially using a counterparty'sinformation to bet against it. XTX Markets, an automated tradingfirm climbing the market share rankings, has also madeassurances about hedging.

The fact that the whole industry hasn't followed suit isworrying, says David Mercer CEO of LMAX Exchange, an electronictrading platform.

“I'm not sure how you can hedge risk you haven't taken yet —that's called front running, and it's unethical and illegal,”Mercer sad. LMAX doesn't allow last look on its platform and wouldpotentially benefit from restrictions on the practice. “It's anabhorrence that it exists.”

Other firms have warned traders of risks: Goldman Sachs GroupInc. says it “may trade prior to or alongside a counterparty'stransaction,” though will try to avoid “undue market impact.”Barclays' website states trade rejections are for riskmanagement.

“At least they are telling clients about what they doing, andthen a client will decide to trade or not with them,” said DmitriGalinov, CEO of currency-trading platform Fastmatch Inc. “Any lastlook disclosure that does not go into details of what is done withthe client order info and how it is used during the hold time isinadequate.”

Players Changing

As the debate unfolds, the industry's major players arechanging. Electronic specialists are eating into market share thatwas once dominated by banks. And while proprietary traders oftendon't have clients in the same way a top-tier bank does, theirgrowing clout has increased scrutiny of their practices.

As trading platforms evolve, it's easier for nonbanks to tradedirectly with counterparties. That makes newer generationelectronic market makers like Virtu Financial Inc. and CitadelSecurities more closely resemble dealers, meaning they can also uselast look. The two firms say they provide foreign-exchangedisclosures when they trade directly with another firm, though thedocuments aren't public.

The industry's code of conduct may increase pressure on firms tostep up their efforts. The code in development by central banks andindustry will apply to banks, proprietary traders, investors andoperators of electronic platforms.

“It's a bit more than just simple disclosure,” said Debelle,chair of the Bank for International Settlements working groupfor developing the code. “There's an obligation to explain to yourcounterparty what exactly is going on with their order.”

Bloomberg LP, the parent of Bloomberg News, operates a currencyvenue.

Technological changes may also make last look obsolete.

While the market is fragmented across a range of venues, traderslook mainly to two of the biggest platforms — operated by NEX Groupand Thomson Reuters Corp. — as the authorities on currency prices.Both companies are speeding up price updates on their systems.

The upshot is that there's theoretically less lag, meaning lessroom for prices to change unexpectedly. Some traders say thatreduces the need to protect themselves via last look.

“Last look probably is a somewhat out-of-date practice given thetechnology we have now,” said Kevin McPartland, head of researchfor market structure and technology at Greenwich Associates.“However, if investors really had a problem with it, they wouldhave taken their business elsewhere and they for the most parthaven't done that yet.”

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