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What is “Last Look” in Forex Trading?

Using Last look in forex trading is quite an obvious business. Last look trading is a term that deals with the order executions.

As you know, there are two types of brokers in the forex market. We have the market makers (who serve as a liquidity bridge) and the Electronic Communication Network providers.

ECN trading is about the most transparent way of getting prices and trading assets in the forex market. This is possible using FIX. FIX or FIX protocol is an abbreviation for the Financial information exchange.

If you are interested, you can read more about FIX here. On the dealing side of the trade, the broker obtains liquidity from 1st tier major banks, who usually serve as the liquidity providers.

The pricing of the asset from the banks is then provided to traders on the buying end for trading purposes.

On the other side, the price you see is an aggregation of the different bid and ask orders. Such orders are aggregated from the broker’s different liquidity providers. The trader is at liberty to select the price quote that he finds most suitable and initiates the order.

Understand how last look in forex trading works

In a no-dealing desk environment, when you place an order, it is passed on by your forex broker to their liquidity provider.

The ECN or non-dealing desk brokers make money by charging commissions on these trades. The higher the trade volume, the more money the ECN brokers make. Hence, capital requirements for opening ECN accounts at a premium. A typical ECN account opening balance can start from $10,000.

Now while there is transparency in pricing within the ECN environment, it is still possible for a trader’s orders to be rejected, even though this is rare. If this happens, then the trader is probably a victim of the “last look” phenomenon.

“Last look” is a practice in financial trading. This is when banks serving as the liquidity providers can take a look at the trade before execution. Last look is controversial to say the least. Trading orders can be accepted or rejected using last look.

The practice of Last look came into play in the early days of online forex trading. This was at a time when infrastructure for trading currencies online were very basic. Trading order processes were extremely slow. Hence banks and broker-dealers adopted this practice to protect themselves from trades that had gone too far ahead of their pricing.

Think of it this way – if you wanted to buy the EURUSD at 1.1205, and the market is trading at 1.1200. Your order is just 5 pips from the market. But if the order was slow and the EURUSD is now at 1.1245, then what happens? Using last look, the broker-dealer can reject your order, rather than execute a buy at 1.1245.

Example of last look concept in forex

For instance, if a trader went long on the EURUSD at 1.5490 and the market had moved to 1.5505 by the time the liquidity providers had got the trader’s order, executing the order at the old price would immediately put the trader 15 pips in profit.

If so many traders especially those with very large orders got these types of fills, the liquidity providers would go out of business. The last look concept came into being because of these practices. While the intentions are good, there is a lot of room for abuse and conflict of interest.

However, most of the infrastructure for online trading has improved significantly, but the “last look” practice still exists. Using last look an order can be rejected for many reasons. This can range from the order being unusually large (which isn’t possible when using a retail forex broker), to when price cannot be matched in the market.

The “last look” phenomenon is more pronounced when there is extreme market volatility due to a ultra-high impact market event such as the situation that occurred on the first trading day after 9/11.

If you want to start trading on an ECN platform, it is imperative to find out if the ECN broker you want to use allows the practice of “last look” from the liquidity providers or not. You have to understand that the ECN brokers show more loyalty to their liquidity providers than to their trading clients.

Usually if a broker does not allow “last look” on their trading platform, they will indicate same on their website.

Last Look in trading – Advantages & Disadvantages

There are really no advantages of “last look” to traders. It does not confer any special advantage to the trader. Theoretically, it may prevent a very large order from skewing the market, but usually the liquidity providers have enough liquidity to handle such orders. Because of this there is no market tilt as a result of the large order placements. The concept of last look is quite prominent with news trading. For example an interest rate news trading strategy certainly attracts a lot of interest from your broker.

The main reason traders like to run away from market makers is because of the excessive price manipulations and counter-party trading practices they encounter. Traders have to contend with such factors in non-ECN environments.

The “last look” practice leads to order rejections, which is not much different from the re-quotes and bad fills that a trader using a market maker may face.

Fortunately, the practice of “last look” is very rare and a lot of brokers have realized that they will lose a lot of business if they keep allowing this. That is why many ECN brokers now have very bold disclaimers dissociating themselves from the “last look” phenomenon.

It is one thing though for a broker to claim that their platform is a “no last look” compliant platform. Eventually, the trader will have to prove this by using an ECN demo account to test if this is actually the case.

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