The term “last look agreement” is a commonly used legal clause that governs transactions between buyers and sellers in the financial market. In this article, we will discuss what a last look agreement is, how it works, and its impact on the trading process.
What is a Last Look Agreement?
The Last Look Agreement refers to the practice of allowing market makers to take a momentary pause before executing a trade, during which they can assess the trade and decide whether to accept or reject it. This pause is typically very short, lasting only for a few seconds or less. The idea behind the last look is to provide liquidity providers with a final opportunity to exercise their discretion over a trade before it is finalized.
How Does a Last Look Agreement Work?
When a market maker receives a trade request, they have the option to accept or reject the trade. If the market maker decides to accept the trade, the transaction is executed. However, before the trade is completed, the market maker is allowed a brief moment to review the trade to determine whether they want to execute it or not.
During this last look period, the market maker can assess various factors such as market volatility, pricing, and risk assessment to determine whether the trade is in their best interest. If they decide to reject the trade, no transaction is executed, and the market maker is free to provide a counteroffer or decline the trade request altogether.
Impact on the Trading Process
Last look agreements have become a prevalent practice in the foreign exchange market, and they have attracted some controversy. Critics argue that the last look practice can lead to inconsistent pricing because it allows market makers to back out of trades that don`t suit them, potentially causing merchants to lose out on a deal.
Despite this, there are some benefits to using last look agreements. The last look period allows market makers to assess the risk and pricing of trades before executing, potentially preventing them from taking trades that would result in losses. This, in turn, provides greater liquidity and reduces market risk.
Conclusion
The last look agreement is a vital clause in the financial market, allowing market makers to assess trades before completing them. While there are controversies surrounding the practice, it has become an essential part of the trading process, helping to provide liquidity and manage market risk. As a professional, it is essential to understand the last look agreement and its impact on the trading process for effective communication with clients and stakeholders.