The role of last look in foreign exchange markets

Last Look is a unique feature of foreign exchange (FX) markets that gives liquidity providers the option to reject orders received from liquidity takers in response to the provider’s quote. This feature is effective in reducing the risk of latency arbitrage in a fragmented, high-speed market place with no centralised price discovery.

Last Look introduces execution uncertainty for investors. We evaluate Last Look in terms of the impact on investors and from the viewpoint of ‘well-functioning markets’. We first characterise Last Look as an option contract. Using our own execution data across global FX pairs, we also study the impact on the liquidity taker over time, particularly if one of the options was ‘exercised’ in Last Look and the order rejected.

Last Look serves a legitimate need of liquidity providers, and can help improve available liquidity to investors. However, there are intrinsic conflicts related to the asymmetry in optionality it introduces, as well as the potential for misuse of private information. We advocate greater transparency in the application of Last Look. We also believe that monitoring of liquidity providers’ behaviour will continue to be a crucial element in maintaining fair implementations of Last Look.