Last Look Economics: What Optionality Costs the Hedge Side

Last-look LP relationships grant the LP a one-sided option: accept fills that move in their favour, reject fills that move against them. That option has a price — and it is paid by the hedge side via wider effective spreads, asymmetric rejection rates, and elevated mark-out. A first-principles look at how to price this implicit option.

Part I — The Optionality Mechanic

1. Why Last-Look Exists

• LPs argue last-look protects them from latency arbitrage by faster counterparties.
• The protection is real for some LPs. For others, the window has expanded into a profit centre.
• Industry hold times range from sub-millisecond to 200ms+ depending on LP discipline.

2. Asymmetric Rejection — The Tell

• Symmetric rejection rates (similar reject % when market moves either direction) = disciplined LP.
• Asymmetric rates (high rejection on adverse moves, low on favourable) = LP exercising the option.
• Industry data shows 3:1 to 8:1 asymmetry ratios at the worst-quartile LPs.

Part II — Pricing the Implicit Option

3. The Cost Equation

The optionality cost can be approximated as: (hold time × volatility × asymmetry ratio) × notional. For a moderately active hedge book with USD 100M daily turnover, even modest asymmetry adds up to 6-figure annual cost.

4. What Compensation Looks Like

• Last-look LPs should price tighter than firm liquidity LPs to compensate for the option granted.
• If a last-look LP shows similar quoted spreads to a firm-liquidity LP, the hedge side is being charged twice.

Putting It All Together

Last-look is not inherently abusive — but it's also not free. The hedge side grants real economic value to the LP, and the LP should compensate via tighter pricing. When that compensation is absent, the relationship is structurally asymmetric and the cost is hidden in mark-out.

Sources

• FX Global Code (2021 update) — last-look principles.
• BIS Markets Committee report on last-look practices, 2023.
• Orbis Securities LP rejection asymmetry studies, 2025–26.