The Last Look liquidity strategy plays a pivotal role in modern FX market structure, especially within electronic trading environments. It is both widely used and frequently debated due to its implications for price transparency, execution quality, and market fairness. This article explores how Last Look works, the motivations behind its use, and how it can be incorporated into an effective liquidity strategy.

What Is Last Look in FX Trading?

In the foreign exchange markets, Last Look refers to a liquidity provider’s (LP’s) ability to reject or accept a trade request after it’s received but before it is executed. This slight delay — often just a few milliseconds — allows the LP to perform pre-trade risk checks, such as:

• Price validity (checking for stale quotes)
• Credit limits
• Latency arbitrage detection
• Inventory impact evaluation

If the trade passes these checks, the LP “accepts” the trade and it is executed. If not, the trade is “rejected”, often returned with a ‘last look reject’ message to the counterparty.

Why Do Liquidity Providers Use Last Look?

Liquidity providers, especially those quoting tight spreads, use Last Look to protect themselves from adverse selection and ensure pricing is consistent with current market conditions. Their main motivations include:

• Latency arbitrage protection: Ensures clients aren’t trading on stale quotes.
• Risk management: Allows time to evaluate counterparty credit and inventory impact.
• Spread optimisation: Enables LPs to quote tighter spreads without bearing full market risk on every fill.
• Toxic flow detection: Helps filter out clients using high-speed trading to exploit microstructure inefficiencies.

How the Last Look Process Works

1. Client submits a trade request based on a streamed quote.
2. LP receives the request and initiates Last Look timer (typically 1–3 milliseconds).
3. Checks are performed for price validity, credit, and internal risk limits.
4. Decision point:
   • If approved: the trade is filled.
   • If rejected: the trade is declined or requoted.

Types of Last Look Implementations

1. Binary Last Look

The LP either accepts or rejects the trade request with no price adjustment. This is simpler but can lead to higher reject rates during volatile conditions.

2. Asymmetric Last Look

If market prices have moved against the LP, the trade may be rejected. If the move favours the LP, the trade is still executed. This is a common model but often criticised for being unfair to takers.

3. Full Requote Model

Instead of rejecting outright, the LP returns a new price for the client to accept or reject, offering more transparency.

Incorporating Last Look into a Liquidity Strategy

For brokers, aggregators, or institutional takers, handling Last Look quotes requires strategic consideration. A robust Last Look liquidity strategy includes:

1. LP Selection and Tiering

• Evaluate LPs by fill ratios, reject rates, and latency.
• Prioritise LPs with consistent behaviour and low asymmetry in Last Look decisions.
• Tier clients based on toxicity — send lower-risk flow to more sensitive LPs.

2. Smart Order Routing (SOR)

• Dynamically route orders to the LPs with the best fill probability and lowest rejection latency.
• Factor in historical reject patterns, response times, and market conditions.
• Include failover LPs in case of rejection or delay.

3. Latency Monitoring

• Measure time between order send and acknowledgment.
• Track changes in LP quote staleness.
• Deploy co-located servers or proximity hosting near LP data centres (e.g. Equinix LD4, NY4).

4. Data Analysis and Rejection Mapping

• Analyse rejected trades to understand patterns.
• Correlate reject spikes with market volatility or specific trading sessions.
• Detect whether rejections are truly due to adverse selection or poor LP behaviour.

Advantages of Last Look Liquidity

• Tighter spreads due to reduced LP risk.
• More liquidity during normal market conditions.
• Protection against toxic order flow and stale price exploitation.
• Customised pricing for different client profiles.

Risks and Challenges

• Potential for abuse by LPs offering asymmetric execution.
• Reduced transparency in execution quality.
• Higher reject rates during high-impact news or volatile conditions.
• Negative client perception, especially among institutional players.

Regulatory and Market Sentiment

Regulators and central banks, including the Bank for International Settlements (BIS), have expressed concerns about the fairness of Last Look. Industry bodies have proposed reforms, including:

• Transparent reject codes
• Minimum response time windows
• Symmetric treatment of price movement
• Disclosure obligations from LPs to takers

The FX Global Code encourages clear communication about Last Look practices and mandates fair usage, helping to restore confidence and market integrity.

Best Practices for Implementing a Last Look Strategy

• Disclose LP behaviour transparently to clients.
• Use hybrid pools: combine Last Look and firm liquidity where possible.
• Align client execution expectations with actual fill statistics.
• Continuously monitor LPs with detailed analytics and compliance oversight.

Conclusion

The Last Look liquidity strategy is a double-edged sword — offering significant benefits in spread efficiency and risk control for liquidity providers, while posing challenges for market transparency and execution consistency. By carefully selecting LPs, using smart routing, and monitoring fill quality, trading firms can effectively navigate this landscape.

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