Quote-Driven Market Microstructure describes a market design where liquidity providers, often called market makers or dealers, publicly display bid and offer prices for assets, and trades occur by participants accepting these displayed quotes. In crypto markets, this structure is prominent in over-the-counter (OTC) desks and request-for-quote (RFQ) systems, particularly for institutional options trading and larger block trades. Its purpose is to facilitate trading through disclosed prices from liquidity providers.
Mechanism
Participants wishing to trade interact directly with a market maker or send an RFQ to multiple dealers, who then provide two-sided prices. The dealer is obligated to trade at their quoted prices up to a specified size. This contrasts with order-driven markets where buyers and sellers submit orders to a central order book. In crypto, many institutional platforms operate on this model to manage liquidity and reduce market impact for significant order sizes.
Methodology
The methodology for operating within a quote-driven market involves market makers continuously assessing risk, inventory, and market conditions to generate competitive and executable quotes. Trading algorithms are designed to request quotes from multiple liquidity providers, comparing prices and executing with the most favorable offer. In crypto, this often involves smart trading systems routing RFQs to a pool of institutional liquidity providers, leveraging off-chain mechanisms for price discovery before on-chain settlement, thereby providing tailored liquidity.
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