Monday, April 15, 2013

Understanding "Last Look" in ECN Forex Trading Terminology

Understanding "Last Look" in ECN Forex Trading Terminology

It is true that the ECN forex brokers (Electronic Communications Network) offer transparency. Most of them would use "100 percent transparency," "No Dealing Desk," "pure interbank access" and other marketing jargon in order to lure the traders. Yet, there is more to it than what meets the eye.
Many times, you experience your trading platform freeze time and again or ask for re-quotes. If this happens, you probably are a "last look" victim.
Before we try to understand what is meant by "last look," let's see what is an ECN. ECN is a trading platform that connects the buyers and the sellers, thus eliminating the need for middleman. There is total transparency and the traders get to view the Bid and the Ask rates in real time.
Practically anyone can trade on ECN. This means that big financial institutions and banks also trade on ECN along with the individual traders.
Now, most of the standard ECNs have fixed liquidity providers. These could be trading firms or even banks. It is but natural that the liquidity providers enjoy deep relationships with the ECNs, and therefore it is more than business as usual.
These firms and banks reserve the last look provision to see your trades before they are filled in.
So what exactly is "last look"?
Last look means your ECN broker gets a chance to see your trade before accepting it.
Let's see how this happens. When you place an order on a standard ECN, your broker will try to match the order. Mostly he will try to match your order within his clients to earn commission from both the parties. This is like a win-win situation for both the traders and the broker.
But what happens when the broker is unable to fill your trade?
Well, if your order is big and cannot be filled by existing traders on the ECN, the broker asks the liquidity providers to fill in the order. These liquidity providers, which are the banks, may take a last look at your trades.
Although ECN brokers have a repute of not trading on the other side of your trade, the fact remains that many ECN platforms comprise of a feature which allows them to look at your trade and reject it. This happens because the bank is a counter party to your trade.
Although the bank has just a few seconds to reject your order, last look can still rob you of your profits. The slippage would be as high as 100 pips at times.
Thus, too many rejections and wide slippages could be because of the "last look" provision.
Not all Slippages are a result of the "last look."
Many times you find slippages even when your ECN may not be looking at your order.
The reason for slippages is that ECN works in real time. Let's see this with an example:
Suppose you want to go long with the Euro and you place a market order for the same. When you place your order, the market price was 1.2750. Now, the market is volatile and by the time your order is filled in, the market moves to 1.2752.
Worse still, if you are trading just before an economic announcement, the chances are that the market would move further and you may not get a buyer even at 1.2760.
Another reason is that in a volatile market or just before an announcement, the banks along with the speculative traders are pulling last minute orders in frenzy. This could result in greater volatility.
In such cases, you may start thinking if the ECN used the "last look" to protect the interbank. But the slippage could occur out of sheer high market volatility.
Are ECN Forex Brokers a better option?
It must be mentioned that an ECN broker is indeed a better option than a normal Forex dealer with a dealing desk. One of the biggest advantages of trading with an ECN broker is that you will not find crazy spreads of 20 to 50 pips. Again, the commission charged by an ECN broker is generally in the range of 1 or 2 pips per transaction. Thus, with an ECN broker you can enjoy tight spreads and commissions.
However, it should be remembered that the spreads are based on the volume being traded in that particular trading session.
Most of the ECN brokers also protect your capital with "No negative balance" clause.
While selecting an ECN broker, check if your trades will be executed instantly. Since the practice of "last look" is quite prevalent, those who refrain from it mention so on their website. So, while selecting an ECN broker, check out if they say "No Last Look".
Although ECNs are not the holy cow, they are at least far better than your traditional retailer.


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Ali Beool said...

They are indeed a market maker. Many brokers are. They electronically lay off their risk by hedging all trades on the open trading market. Some brokers can trade against you, but not all of them do. I have not personally seen any behavior from Oanda that would indicate that they are. However, I’m not a conspiracy theorist about it either.
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