RFQ market making in crypto institutional trading involves liquidity providers actively quoting bid and ask prices in response to specific Request for Quote inquiries from institutional buyers. Its purpose is to supply liquidity to the market, facilitate large block trades, and enable efficient execution for assets that may not have deep liquidity on open exchanges.
Mechanism
The mechanism begins when an institutional buyer sends an RFQ for a particular crypto asset, quantity, and side to a select group of market makers. These market makers, utilizing proprietary pricing algorithms and risk management systems, analyze the request, assess market conditions and their inventory, and then submit a firm, executable two-sided quote (bid/ask) or a single-sided quote within a defined time window. The buyer then chooses the best quote for execution.
Methodology
The methodology for successful RFQ market making requires advanced quantitative models for price discovery, robust infrastructure for low-latency quote generation, and dynamic risk management systems to manage inventory and market exposure. Principles include maintaining tight spreads while managing execution risk, optimizing capital deployment across various assets, and providing consistent liquidity even during volatile market periods to attract recurring institutional order flow.
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