The practice of last look has been a subject of discussion, with global regulators showing reluctance toward its persistence, despite its continued presence in the global foreign exchange (FX) market.
In essence, last look is a trading practice where liquidity providers (LPs) receiving an order request have a final opportunity (“take a last look”) to accept or reject the request against a quoted price. Simply put, it grants LPs the ability to decline an order after a price has been quoted and matched.
In 2021, the Global Foreign Exchange Committee (GFXC) issued a paper on the subject, providing guidance to the FX market while complementing Principle 17 of the Global Code, which relates to last look practices.
While the Code does not ban the use of last look, it stipulates that it may only be employed as a risk control mechanism for validity and price checks.
The Dilemma of Last Look: Two Sides of a Coin
Given the fragmented nature of the FX market, last look serves as a safeguard for LPs who quote prices across various platforms.
When a trade request is received on a venue that permits last look, the LP faces a spectrum of choices: they may choose to retain the request for a certain duration, execute the trade at the quoted price, update their quotes, or opt to reject the trade.
However, all these outcomes introduce varying degrees of uncertainty for the liquidity consumer in their pursuit of a desired transaction and the associated price.
The Current Positioning of FX Brokers on Last Look Disappearance
FX brokers, as intermediaries between traders and liquidity providers, have a unique position to influence change in the market. They can take proactive steps to eliminate last look practices and promote transparency, thereby fostering fair and efficient trading for all market participants.
A Shift Toward “No Last Look” Venues
“No last look” venues operate on a simple principle: once a trade is agreed upon, the order can get either filled or rejected with no holding period applied.
Several FX brokers have already incorporated 'no last look' trading policies into their services, giving traders confidence that their trades will be executed as agreed upon.
Alternative Risk Management Tools
One of the challenges associated with the elimination of last look practices is managing the associated risks. However, there are some alternative risk management tools to address these concerns.
These tools aim to address the concerns associated with adverse market movements without resorting to last look rejections. Some of these risk management tools include pre-trade risk controls, enhanced credit risk assessments, and improved pricing models.
Pre-trade risk controls, for example, allow brokers to set specific limits on client orders to prevent excessive risk exposure. This approach ensures that risk is managed at the entry point, reducing the need of long holding periods.
Looking Ahead
Regardless of the outcome of the ongoing debate surrounding last look, the focus should shift towards adopting technology that helps brokers achieve their primary goal: delivering the best possible investment outcomes to their clients.
If you are looking for competitive liquidity in FX Spot, Metals and NDFs offering low response times and stable execution reach out to the highly experienced Sales and Liquidity Team at Alp Financial via efxsales@alpfin.com.