What is Last Look in Forex?
Last look in Forex is simply the ability for the liquidity provider filling your trade to reject your order, although you might already have hit his price.
For example, liquidity provider A (LP A) places a BUY limit order at 1.3500 for EURUSD for 10 lots. You decide to Market SELL 10 lots of EURUSD on your trading platform. Assuming that the market price is 1.35000, liquidity provider A’s BUY limit order at 1.3500 will be filled. However, having ‘last look’ means he can reject your trade within a 200 milliseconds.
The sequence of images below explains what is last look in a graphical format. The images show the price ladder and the size of the bids and offers (i.e 10)
What happens if LP A rejects your trade?
Simple. You get filled at the next best price. So if the liquidity provider A rejects your trade, and the next best price is 1.3499, your sell order is filled at a worse price of 1.3499, and you get a slippage of 1pip.
How does last look affect Slippage?
As mentioned earlier, you get filled at 1.3499 instead of 1.3500, and this results in a 1pip slippage.
Real life example of last look
Here is a real life example of last look in action. In this trade, we can see that Deutsche Bank (DB) rejected the trade, and UBS filled the trade at a worse price of 0.83264, instead of the original 0.83261. Slippage is 0.3pips.
In this second image you can see again that UBS filled the trade.
Why did ‘last look’ come about?
Last look came about because of the decentralised nature of spot Forex and also to combat high frequency trading firms (HFTs) picking off lagging quotes. HFTs also use last look to flash orders and gauge where the general market sentiment is.
Decentralised nature – Let’s say you are a bank and you want to offer liquidity. You are approached by many ECNs (like EBS, Reuteurs, Integral, Fxall, Currenex, etc) to participate in their ECN and put your price on their ECNs. Let’s say you only want to offer EURUSD, with a 2pip spread (i.e. 1.3500 1.3502) and 20 mil (200 lots) deep on each side.
You put your price out to 10 different ECNs. Now, you are 200 mil deep in total. You don’t really want all that liquidity. So the moment your price on one of the ECNs is hit, you immediately reject (last look) all of the other 9 ECNs because you don’t want all that extra liquidity.
As a result, the trader who hit your price on the other 9 ECNs has his trade rejected and is filled at a worse price.
Combating HFT firms
1. Flashing orders – Let’s say you are a HFT firm and you want to gauge where the general market sentiment is. You ‘flash’ bids and offers (post them for a very short period of time) and see if anyone tries to hit your price. If you post a very large offer and someone tries to hit you, you know that there is an aggressive buyer around. Similarly, if you post a very large bid, and someone immediately tries to hit it, you know there is an aggressive seller around.
Unfortunately because your bids and offers are posted and removed so quickly, no one can actually hit them (which is what you want). As a result the trader who tries to hit your price gets filled at a worse price. In the event that your ‘flash’ bids or offers are hit, the HFT firm is able to use last look to reject the order.
2. Preventing latency arbitrage - In the early 2000s, liquidity providing banks had poorer technology than HFTs firms. HFT firms were much faster and were able to take advantage of mispricing. HFT knew much quicker that prices had changed and seeked out any quotes from banks that were still quoting the older price. These HFT firms hit the lagging quotes and immediately sold them to the market for a risk free profit. This is also known as latency arbitrage.
Because it would take awhile for the technology of banks to catch up to HFTs, the banks needed a solution to combat these HFTs. The solution was ‘last look’. As you can already guess, the last look prevents the HFTs from taking advantage of their lagging quotes, by simply rejecting the order.
Pros and cons of ‘last look’ pricing
Pros of ‘Last Look’