Risk & Compliance

Barclays Fined $150M Over ‘Last Look’ System

Barclays did not seek 'to distinguish toxic order flow from instances in which prices merely happened to move in favor of the customer,' said the N...
Matthew HellerNovember 19, 2015

New York’s financial regulator has fined Barclays Bank $150 million for misusing a foreign exchange trading system so that it automatically rejected client orders that would be unprofitable to the bank.

The New York State Department of Financial Services said Wednesday that Barclays had agreed to the penalty to resolve an investigation of how it operated its “last look” system from at least 2009 through 2014.

The system allowed Barclays to reject a forex trade during the milliseconds-long “latency” period between an order and its execution. While Barclays said the system protected the bank against “toxic trading” — when sophisticated buy-side investors use a technological trading edge to put dealers at a disadvantage — the NYDFS found Barclays used it “broadly and indiscriminately.”

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“This case highlights the need for greater oversight and action to help prevent the misuse of automated, electronic trading platforms on Wall Street, which is a wider industry issue that requires serious additional scrutiny,” Anthony J. Albanese, acting superintendent of financial services, said in a news release.

Specifically, the NYDFS said in a consent order, Barclays did not seek “to distinguish toxic order flow from instances in which prices merely happened to move in favor of the customer and against Barclays after the customer’s order was entered on Barclays’s systems.”

Even when prices within the latency period moved against Barclays and in favor of the customer beyond a certain undisclosed loss threshold, Barclays treated the trade as toxic flow, according to the NYDFS.

The regulator also said that when customers questioned the bank about the rejected trades, they were given a variety of misleading explanations or not answered at all.

According to MarketWatch, last look “has become one of the most contentious issues in the foreign-exchange market, which for decades was barely regulated and controlled by a handful of global banks.” Critics have questioned why the system is necessary when electronic trading has reduced latency time down to milliseconds, making the market more transparent.

Barclays agreed in May to pay $2.4 billion to settle allegations by the NYFDS and other U.S. agencies that it conspired to manipulate the foreign-exchange market.