FX industry is still divided when it comes to the ‘last look’ topic. However, X Open Hub believes that ‘last look’ is a thing of the past, as the banks have made up for the technology gap that has not long ago existed between them and other market participants.
‘Last look’, a controversial practice that allowed bank dealers to review orders in ECN (Electronic Communication Network), even after accepting an order, has been criticized for a long time because it gave too much advantage to the selling party, i.e. liquidity providers. Operators are currently moving towards restricting this practice or totally rejecting it in order to optimize the quality of execution of orders.
However, the issue is topical current and hot. Some participants say that ‘last look’ has created unequal conditions for market participants because it favors the selling party, while others suggest that banks need this privilege as they face the biggest risk.
‘Last look’ was introduced due to the destructive practices of market participants-buyers, who practiced market share through multiple platforms with the intention of using a delay element, the so-called “latency arbitrage”.
Banks often provide much more liquidity than they can handle, so they use ‘last look’ to reduce the risk. In the case of regular customers, ‘last look’ is probably not necessary. The case is different for aggressive customers, who use HFT (High Frequency Trading), and here banks may wish to use the ‘last look’ privilege.
In addition to the risk mitigation function, which results from the provision of liquidity to multiple platforms simultaneously through ECN, some bank dealers argue that ‘last look’ also helps to provide the best possible liquidity to the market. In case of the same price issue through two different platforms, the main assumption is to avoid having to effect a double transaction, so ‘last look’ gives you the ability to check the transaction and make sure that the price is the best at the moment. On the other hand, from a risk management perspective, it is possible to verify whether an offer is not in a transaction on two platforms at the same time, which could expose the bank to too much risk. If this happens too often, the bank would probably reduce or withdraw liquidity. This does not work for anyone.
In the meantime, some platforms and liquidity aggregators say that ‘last look’ is a thing of the past, as it was intended to be a mechanism that was supposed to balance technological disparity between participants of the electronic FX market. With today’s technological advances, this kind of practice is no longer necessary.
‘Last look’ was a business solution to a technological problem. Owing to increased efficiency and speed of the systems, banks no longer need ‘last look’ at 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 that.
Banks face increasing challenge while providing liquidity to the increasingly decentralized FX market, where the number of aggregators and platforms is growing day by day. The desire to deliver liquidity to as many platforms as possible is understandable, otherwise the banks would limit their market penetration. This is not a process that improves the quality of liquidity, and therefore the quality of execution of orders.
From the perspective of the customer, the biggest challenge is to identify an operator whose legal regulations require to function in a transparent structure, as it directly affects the quality of execution of orders.