FastMatch plans to roll out a new order type next month that aims to “outsource” last look from the market maker to the venue itself.
The new order type, called the Leak/Sweep Protection (LSP), is currently available for testing in UAT and will be officially available on the platform on May 15.
When LSP order type is enabled by a maker, FastMatch will hold the orders from a taker that are attempting to match with the maker’s quote for a specified period of time.
If, during the hold time, the market moves away beyond a specified pip threshold, FastMatch will reject the order from a taker. Otherwise, FastMatch will send the order to the maker for execution at the original matched price.
A maker can select a benchmark for the market movement, such as its own quotes, FastMatch midpoint, FastMatch best bid/offer. But when LSP is enabled, the maker is expected to execute 100% of orders that are sent through to them. The makers can provide price improvement on the execution.
“The main usage of last look by market makers is to make sure that no one is sweeping out the market and moving it against them. But market takers don’t like last look because they see that someone (ie, the maker), has received
information about their intent to trade on a price and yet the trade doesn’t happen,” Dmitri Galinov, CEO of FastMatch, tells Profit & Loss.
“What this order type does is bring that interaction into a neutral venue, so we sit in the middle and protect the parties on both sides of the trade. It will make the takers happy, because although they will still have some trades rejected,
they will not have had any of their information exposed to the market.
“It also helps makers, because right now they face an operational nightmare with regards to last look, because when banks reject orders there’s a bigger compliance burden around documentation when they reject orders.”
In contrast, Galinov says that there’s no operational overhead attached to rejects using the LSP order type, because the rejection is outsourced to a neutral third party venue. He adds that FastMatch will be using an objective process
for rejecting trades and this process will be published on the platform’s website.
“The taker understands how the order type operates and if the trade is rejected, the taker would therefore understand that the market moved and that is why their trade was rejected,” he says.
While this new order type might potentially help alleviate taker concerns over information leakage, it is still an asymmetrical application of last look, because if the market moves to disadvantage the maker, the order will be
However, Galinov claims that takers are less concerned about asymmetrical use of last look than about information leakage.
“I think that takers understand that the makers need to make money for providing liquidity and they have to protect themselves from adverse market movements. I think that the taker client understands this notion, but what they’re not happy about is where there is information leakage about the order flow that they expose to the makers,” he says.