Last look

Roel Oomen

Quantitative Finance, 2017, vol. 17, issue 7, 1057-1070

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.

Date: 2017
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/14697688.2016.1262545 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:17:y:2017:i:7:p:1057-1070

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697688.2016.1262545

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().