According to The Metro, Liverpool thought that they had the transfer in the bag, only for Arsenal to nip in and sign the former-HJK Helsinki academy player to a three-year contract.
He passed a medical after completing a trial with the Gunners and will put pen to paper on the Arsenal contract before joining the club's academy ahead of next season.
Keto spent time with Liverpool training with the Anfield club's youth teams last season, and impressed enough for the Reds to invite him back this summer. They thought they had the deal effectively wrapped up, especially considering Keto is a Liverpool supporter, but the Finnish under-19 international has snubbed them for Arsenal.
At 6ft-3ins, Keto already has the build of a Premier League goalkeeper, but Arsenal fans face a long wait before they can see him in action for the first-team.
Arsenal youth signings
It's the second youth team signing this week, after the club won the race to sign former-West Ham United player Ben Sheaf. The England under-16 international left the Hammers to join his younger brother, also on the books at Arsenal.
The Gunners academy is rated as one of the best in the United Kingdom, and Arsene Wenger is a manager that gives youth a chance in the first-team. During last year's preseason tour it was Gedion Zelalem, then 16, who got Arsenal fans excited with a number of assured displays in the Far East.
He has since made the first-team bench a couple of times and the Arsenal coaching staff have high hopes.
Liverpool transfer targets
It's a blow for the Reds, but Rodgers's focus will be on signing players that can help his team right now. With Champions League football on the horizon, the Liverpool boss needs strength in depth, something a 16-year-old goalkeeper does not give you.
Rodgers has three signings confirmed already - Adam Lallana, Rickie Lambert and Emre Can - but that's unlikely to be it. Bayern Munich's Xherdan Shaqiri could be next, after his Switzerland side were eliminated from the World Cup this week.