Last Look

Quantitative Finance, 2017, 17 (7), pp 1057-1070

Posted: 16 Nov 2016 Last revised: 26 Nov 2017

See all articles by Roel C. A. Oomen

Roel C. A. Oomen

Deutsche Bank AG (London); London School of Economics & Political Science (LSE) - Department of Statistics

Date Written: November 1, 2016

Abstract

In over-the-counter markets, a trader typically sources indicative quotes from a number of competing liquidity providers, and then sends a deal request on the best available price for consideration by the originating liquidity provider. Due to the communication and processing latencies involved in this negotiation, and in a continuously evolving market, the price may have moved by the time the liquidity provider considers the trader’s request. At what point has the price moved too far away from the quote originally shown for the liquidity provider to reject the deal request? Or perhaps the request can still be accepted but only on a revised rate? “Last look” is the process that makes this decision, i.e. it determines whether to accept – and if so at what rate – or reject a trader’s deal request subject to the constraints of an agreed trading protocol. In this paper I study how the execution risk and transaction costs faced by the trader are influenced by the last look logic and choice of trading protocol. I distinguish between various “symmetric” and “asymmetric” last look designs and consider trading protocols that differ on whether, and if so to what extent, price improvements and slippage can be passed on to the trader. All this is done within a unified framework that allows for a detailed comparative analysis. I present two main findings. Firstly, the choice of last look design and trading protocol determines the degree of execution risk inherent in the process, but the effective transaction costs borne by the trader need not be affected by it. Secondly, when a trader adversely selects the liquidity provider she chooses to deal with, the distinction between the different symmetric and asymmetric last look designs fades and the primary driver of execution risk is the choice of trading protocol.

Suggested Citation

Oomen, Roel C.A., Last Look (November 1, 2016). Quantitative Finance, 2017, 17 (7), pp 1057-1070. Available at SSRN: https://ssrn.com/abstract=2870067

Roel C.A. Oomen (Contact Author)

Deutsche Bank AG (London) ( email )

Winchester House
1 Great Winchester Street
London, EC2N 2DB
United Kingdom

London School of Economics & Political Science (LSE) - Department of Statistics ( email )

Houghton Street
London, England WC2A 2AE
United Kingdom

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