Foreign exchange markets with last look

DOI10.1007/S11579-018-0218-3MaRDI QIDQ2633450zbMATH OpenOpenAlexWikidataFDO

Authors Álvaro Cartea, Sebastian Jaimungal, Jamie Walton

Publication date 8 May 2019

Published in Mathematics and Financial Economics (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/1806.04460, https://ora.ox.ac.uk/objects/uuid:de578ac6-63ab-41e1-adc9-4dc6900ca234

zbMATH Keywords

algorithmic tradingforeign exchangehigh-frequency tradinglast looklatency arbitragelow latency tradersspammingsprayingstale quotes

Mathematics Subject Classification ID

Portfolio theory (91G10)

Abstract: We examine the Foreign Exchange (FX) spot price spreads with and without Last Look on the transaction. We assume that brokers are risk-neutral and they quote spreads so that losses to latency arbitrageurs (LAs) are recovered from other traders in the FX market. These losses are reduced if the broker can reject, ex-post, loss-making trades by enforcing the Last Look option which is a feature of some trading venues in FX markets. For a given rejection threshold the risk-neutral broker quotes a spread to the market so that her expected profits are zero. When there is only one venue, we find that the Last Look option reduces quoted spreads. If there are two venues we show that the market reaches an equilibrium where traders have no incentive to migrate. The equilibrium can be reached with both venues coexisting, or with only one venue surviving. Moreover, when one venue enforces Last Look and the other one does not, counterintuitively, it may be the case that the Last Look venue quotes larger spreads.

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Cites work

• Execution in an aggregator
• Last look

Cited in

(8)

• Detecting correlations and triangular arbitrage opportunities in the Forex by means of multifractal detrended cross-correlations analysis
• Last look
• The Shadow Price of Latency: Improving Intraday Fill Ratios in Foreign Exchange Markets
• Latency and liquidity risk
• Trading foreign exchange triplets
• Market making with minimum resting times
• Algorithmic market making in dealer markets with hedging and market impact
• AI-driven liquidity provision in OTC financial markets

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