Last look optionality describes a practice, particularly prevalent in over-the-counter (OTC) foreign exchange and certain institutional crypto markets, where a liquidity provider receives a client’s trade request but retains a final, brief period to accept or reject the order. This period allows the liquidity provider to re-evaluate the quoted price against real-time market movements, potentially rejecting the order if the market price has moved adversely during the latency window. Its fundamental purpose, from the liquidity provider’s perspective, is to mitigate risk exposure during rapid price fluctuations.
Mechanism
Operationally, when an institutional client sends an RFQ for a crypto asset, the liquidity provider’s system captures the request and provides an indicative price. Before final confirmation, the system or a human trader applies a ‘last look’ check, comparing the initial quote to the very latest market data across aggregated liquidity venues. If the market has moved beyond a predefined tolerance, the trade may be rejected or re-quoted. This mechanism introduces an asymmetry where the liquidity provider benefits from favorable price movements while being able to decline unfavorable ones.
Methodology
The strategic approach for liquidity providers employing last look centers on dynamic risk management and capital preservation in volatile markets. This methodology aims to protect against latency arbitrage and adverse selection, especially when providing tight spreads for large institutional crypto trades. However, from a client’s perspective, understanding this optionality is crucial for assessing execution quality and potential slippage, necessitating robust analytics and careful selection of counterparties in the RFQ crypto and institutional options trading space to ensure fair execution.
Optimal RFQ designs for large crypto options trades strategically mitigate adverse selection by controlling information flow, enhancing anonymity, and ensuring quote firmness.
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