Mechanism of final viewing

The foreign exchange market is an OTC market?

What is the OTC market, the counter market? To put it bluntly, the market where you can talk about anything, for example, you are familiar with the owner of a small shop at the door of your neighborhood, you can even break the bank, but if you have no half-baked relationship between you, even if you say, that your credibility in his heart is zero, then the boss will bless every word you say with doubt. It is the same with trading in the forex market, where everyone wants to trade according to the established rules, because everyone is taking on the benefits of their own money, technology, and also the risks.

What is a last-ditch mechanism? This is a rule that traders and banks set up to protect their interests.

Traditional inter-bank bidding processes are mainly based on: inquiry bidding, transaction confirmation.

• 1.询价：

  Inquiries are usually made by the active trading party in the foreign exchange market according to their own intentions, and the purpose of the inquiry is twofold, one is to let the trading partner know the needs of their company, and the other is to expect the opponent to report a price that they are satisfied with.

• 2. Offer:

  The price quoted is the price quoted by the inquirer, mainly in dollars and units.

• 3.成交：

  The inquirer makes a quick buy-sell decision after the exchange rate is reported by the counterparty and completes the transaction immediately through the trading equipment.

• 4.确认：

  In order to prevent mistakes and misunderstandings, the parties to the transaction confirm the contents of the transaction to each other, including the direction, amount, date of interest and method of settlement.

  It is important to note that after the bidder reports the buy or sell price, the inquirer must immediately answer whether to buy or sell a certain amount of currency. If the inquirer answers slowly, the bidder may say that the price has changed, and the bid is returned.

  Because the exchange rate changes very quickly, instant quotes are only effective immediately, and you have to re-quote a little later, but traders have a certain amount of decision-making power.

• What's the Last Look?

  The traders may be wondering, what is Last Look?

  In simple terms, Last Look means that even if a trader's order matches the liquidity provider's offer, the liquidity provider can still reject the trader's order. Before accepting the order, the liquidity provider can have one last chance to decide whether to accept, which frustrates many traders, as this often leads to a certain amount of slippage, causing the trader's order to be settled at another price.

  That is, even though the trader may have clicked on the liquidity provider's best bid, the provider will still have a Last Look at the trader's order and decide whether to execute the order based on the interest relationship, whereas in the case of the market listing, your order will be settled at the second best price.

• What is the reason for Last Look?

  Last look was first created for delays, and later to prevent high-frequency arbitrage and the decentralized nature of foreign exchange spot transactions.

• Early delays

  In the early days of the forex market, the process of executing foreign exchange trading orders was very slow and there were large delays, such as the trader issuing a quote at the point of EURUSD = 1.0402 at the terminal, while the liquidity provider received the quote at EURUSD = 1.0407. If the popular provider transacted at the price of 1.0402, the trader instantly had a profit of 5 points, while the liquidity provider had a loss of 5 points.

  If there are large orders, then the loss provided by liquidity is very serious.

• Preventing profits

  In the early 2000s, the technology of banks providing liquidity was inferior to that of high-frequency trading firms, which were faster to exploit false quotes. High-frequency trading firms were able to more quickly understand price movements and find out any quotes from banks that were still offering old quotes. These high-frequency trading firms clicked on late quotes and quickly sold them in the market for risk-free profits. This is known as delayed interest.

• The decentralized nature of foreign exchange spot transactions

  The OTC market is a decentralized market, and if you are a bank and you are a market maker, many ECNs want to contact you to access your quotes in their ECN market, but you only offer EUR/USD, two points of difference, and a depth of 200 hands.

  So if you have 10 different ECNs and you have a market depth of 200 million, but that's not all you want, you want 20 million, what?

  Therefore, when one ECN's quote matches, you immediately reject (last look) the other 9 ECNs, and their price will be executed at another poorer price.

  In addition, Last Look is related to the order market transaction, where the market usually gives the price to the customer, so that they can see these prices through the terminal, the customer places an order, the order orders arrive at the market are processed and transacted by a bank, confirmed, and then returned to the user.

• Some of the possibilities behind Last Look:

  For example, liquidity provider A has reached a 10 hand EURUSD limit payment at 1.3500. You decide to sell 10 hand EURUSD at the market price on your trading platform. Assuming the market is 1.3500, liquidity provider A's 1.3500 limit payment will be matched. However, having a last look means he can reject your trade within 200 milliseconds.

• What happens if liquidity provider A rejects your transaction?

  It's simple. Your price will match the next best price. So if liquidity provider A rejects the trade, the next best offer is 1.3499, your trade will be completed at that price, generating a slide of 1 basis point.

• How does the last look affect the slider?

  As mentioned earlier, your trade is closed at 1.3499 instead of 1.3500, which creates a slippage of 1 basis point.

  

  Last Look may result in pre-trade hedging, i.e. if the liquidity provider is able to trade at a favourable price, the trader's order will be accepted; otherwise, the order will be rejected. In theory, if every pre-trade hedge failure is rejected, the profit of the LP is risk-free.

• I'm not sure what to say.

  It originated in the early days of word-of-mouth trading. Banks used it as a risk management mechanism to prevent some potential market risks. With the popularity of electronic forex trading, it has become an inevitable point of contention in the industry.

  Now, the Last Look mechanism has been incorporated into automated forex trading systems, and the lack of transparency in the behavior of Last Look has caused a high level of concern and concern in the buyer market. The UK government's Fair and Efficient Market Review (FEMR) says that the Last Look chip is vulnerable to abuse in its current form, such as marketers who choose to accept or reject orders submitted by customers based on market fluctuations, or to operate other trading activities with customer orders without obtaining consent. In May 2015, US regulators began to intervene in the investigation of LastLook.

  LastLook is still used as a trading model by many players, such as Bats Global Markets' Hotspot platform and Thomson Reuters' FXall platform.

  Some participants believe that the spread will increase if no Last Look makes the bidding range smaller. For the negative impact of Last Look, they believe that the market should not ban, but use clearer criteria. Undoubtedly, banning last look is not the most effective method, and liquidity providers may solve the problem by other methods.

Translated from Digital Exchange Finance