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.
The best execution obligation for OTC derivatives is a mandate to design and prove a systematic process that ensures the best possible overall outcome for a client's transaction.
The primary regulatory consideration for illiquid FICC is evidencing a diligent, systematic process for navigating fragmented liquidity to find the most favorable terms.
The lack of an NBBO in fixed income transforms algorithmic trading from reacting to a public price to architecting a private, composite view of the market for a decisive execution edge.
The RFQ process contributes to price discovery in OTC markets by constructing a competitive, private auction to transform latent liquidity into firm, executable prices.
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