The 'Last Look' is a thing of the past

The 'last look' - a business solution to the problem of technological disproportions, is a thing of the past. However, the subject of this mechanism still divides the participants of the FX industry. LMAX Exchange he believes, however, that this is a thing of the past, because banks have made up for the technological gap that until recently separated them from other market participants. 'Last look', a controversial practice that has allowed bank dealers to review orders in ECN (Electronic Communication Network), even after accepting the order, has been criticized for a long time because it gave too much advantage to the seller, i.e. liquidity providers. Currently, operators are moving towards limiting this practice or its complete rejection in order to optimize the quality of order execution.

However, the topic remains current and hot. Some participants argue that this mechanism has created unequal conditions for market participants because it favors the selling party, while others suggest that banks need this privilege because as liquidity providers they bear the greatest risk.

Introduction - Last Look

This mechanism was introduced due to destructive practices from buyers of market participants who practiced market share through many platforms with the intention of using the element of delay, i.e. "Latency arbitrage".

Banks often emit much more liquidity than they are able to handle, which is why they use 'last look' to reduce risk. In the case of regular customers 'last look' is probably not necessary. The case looks different in the case of aggressive customers using HFT (High Frequency Trading), here banks may want to use the 'last look' privilege.

READ ALSO: MTF vs Stock Exchange vs ECN? and MTF stock market model from LMAX Exchange

In addition to the limiting function risk, which results from the issue of liquidity to multiple platforms simultaneously through ECN, some bank dealers say that 'last look' also helps to provide the best possible liquidity to the market. When issuing the same price through two different platforms, the main idea is to avoid having to perform a double transaction. That is why 'last look' gives the opportunity to check the transaction and make sure that the given price is the best at the moment. On the other hand, from the risk management perspective, it enables verification whether a given offer is not in a transaction on two platforms at the same time, which could expose the bank to excessive risk. If this happened too often, the bank would probably reduce or withdraw liquidity. Such action serves no one.

In the meantime, some platforms and liquidity aggregators claim that 'last look' is a thing of the past. The assumptions were to be a mechanism whose task was to be only to balance disproportions in technological advancement between participants of the electronic FX market. With today's technological advances, this kind of practice is no longer necessary.

Solving the problem

"'Last look' was a business solution to a technological problem. Due to the increased efficiency and speed of systems, banks no longer need this for aggregation. Our liquidity providers are the largest investment banks in the world and as long as we provide them with sufficient connection speed and stable platform, 'last look' is not necessary and we have no problem with it. " - says David Mercer from the LMAX Exchange.

Banks face an increasing challenge by providing liquidity to the increasingly decentralized FX market, where the number of aggregators and platforms is growing every day. The willingness to issue liquidity to as many platforms as possible is understandable, otherwise the banks would limit their penetration of the market. However, this is not a process that has a positive effect on the quality of liquidity, and thus on the quality of execution of orders.

From the client's perspective, the biggest challenge is to recognize the operator whose legal regulation requires functioning in a transparent structure, because it has a direct impact on the quality of the execution of orders.