The time delay between a market maker receiving a client’s request-for-quote (RFQ) or order and the market maker’s final decision to honor or reject that quote, often used to re-evaluate pricing based on recent market movements. In crypto RFQ and institutional trading, managing last look latency is crucial for market makers to mitigate adverse selection risk by ensuring their quoted prices remain valid, especially in highly volatile markets, yet it can introduce potential for client disadvantage if misused. This timing difference carries significant implications.
Mechanism
Upon receiving an RFQ, the market maker’s system conducts a real-time check of prevailing market prices and internal inventory. If the market has moved adversely against the initial quote during the latency window, the market maker may reject the trade or re-quote. A client sends an RFQ. The market maker’s pricing engine generates an indicative quote. During the subsequent “last look” period, the engine receives updated market data, performs a validity check, and then either confirms the original quote or sends a rejection signal. It consists of high-speed market data feeds, a low-latency pricing engine, a quote validation module, and a rapid communication interface.
Methodology
The strategic approach involves market makers employing last look mechanisms to protect against arbitrageurs exploiting stale quotes, thereby maintaining profitability and liquidity provision. Governing principles balance the market maker’s need for risk management with the imperative for fair and transparent execution for clients. Industry standards aim to minimize the latency window and provide clear reasons for rejections. This methodology is rooted in market microstructure theory, specifically addressing information asymmetry and adverse selection problems faced by liquidity providers, with ethical considerations paramount.
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