Why should institutions understand what "last look" means in crypto trading?

Being a subject of wide discussion, last look is a common industry practice in OTC foreign exchange trading. Last look gives liquidity providers the opportunity to pull out of trades at the last moment, even after the trade was accepted by a liquidity taker. Originally the practice was designed to facilitate timely credit checks and validation of prices and inventory on the liquidity providers side, though some may use it to reject orders if the trade is regarded as unfavorable. This may lead to potential conflicts of interest. 

"Last look" in crypto

Last look in crypto trading also can have a number of consequences due to the potential for trade rejections by some liquidity providers. Execution cost is one such consequence, particularly because the liquidity taker loses the opportunity to trade at the quoted price and then has to transact at a worse price. This can result in slippage, meaning that prices on the market may move after an order is placed, causing the cost of executing that order to be higher than expected. As slippage increases, it can further reduce returns and increase risk for liquidity takers.

Moreover, “last look” also raises issues regarding fairness. “Last look” has been described as an “unfair advantage” for liquidity providers since it gives them additional time to decide whether or not they want to execute an order. The additional time may also lead to information asymmetry between liquidity providers and liquidity takers which could lead to worse execution costs for takers regardless of how quickly they react in trying to transact at the best available price. 

Of course, liquidity providers must confront a difficult problem when dealing with unknown customers who are seeking to use predatory trading strategies and take advantage of speed and market data in order to maximize their profits. In such cases, liquidity providers may want to use execution with “last look”. 

Finery Markets: "no last look" execution

At Finery Markets' multi-dealer marketplace, we have addressed this issue by providing "no last look" execution, together with a 50ms speed bump for liquidity takers, which guarantees that any toxic flow is kept out of the liquidity provider's market.

This way, liquidity providers can stream better quotes with tight spreads to the liquidity takers, while the latter achieve best execution thanks to an aggregated order book with streams by global liquidity providers.