The RFQ Process, or Request for Quote process, is a formalized method of obtaining bespoke price quotes for a specific financial instrument, wherein a potential buyer or seller solicits bids from multiple liquidity providers before committing to a trade. It is a prevalent mechanism in OTC markets.
Mechanism
Operationally, a client initiates an RFQ by specifying the crypto asset, desired quantity, and transaction side. This request is electronically transmitted to a selected group of market makers or principal trading firms, who then respond with firm, executable two-sided prices (bid and ask) within a predefined time window. The client subsequently chooses the most competitive quote for execution.
Methodology
The methodology of the RFQ process is strategically advantageous for institutional crypto traders, particularly for large block trades or illiquid assets, as it facilitates competitive pricing, minimizes market impact, and provides access to deep, often off-exchange, liquidity. It is fundamental in institutional crypto options trading and OTC markets, enabling participants to achieve best execution by comparing multiple bids and offers.
Controlling information leakage in the RFQ process is achieved by architecting a system of disciplined counterparty curation and dynamic protocol selection.
Automating an RFQ strategy introduces systemic risks, primarily information leakage and adverse selection, requiring a robust quantitative framework for mitigation.
Information leakage in the RFQ process directly inflates transaction costs by signaling intent, forcing dealers to price in adverse selection and inventory risk.
The primary information asymmetries in an illiquid RFQ process are the initiator's private knowledge of their intent versus the dealer's private knowledge of their inventory and market-wide flow.
Modern trading platforms mitigate the winner's curse in RFQ systems through a combination of algorithmic risk management and transparent "last look" mechanisms.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
