Spread Benchmark, in crypto Request for Quote (RFQ) and institutional options trading, defines a standardized reference point used to objectively evaluate the competitiveness and quality of bid-ask spreads offered by liquidity providers for digital assets or their derivatives. It provides a basis for assessing execution quality.
Mechanism
The establishment of a spread benchmark typically involves deriving a reference spread from prevailing market conditions. This could be based on the best available bid and offer prices across a consolidated view of multiple crypto liquidity venues, a leading reference exchange’s order book, or historical average spreads for similar assets. RFQ platforms use this benchmark to compare quotes received from various market makers, facilitating fair and transparent execution by identifying deviations from the reference price.
Methodology
The governing principle behind a spread benchmark is to offer an objective measure for assessing trading costs and market maker performance. It enables institutional traders to quantify slippage, analyze transaction costs, and make informed decisions regarding smart order routing and counterparty selection. For crypto, the methodology must account for market fragmentation, varying liquidity depths across platforms, and the speed of price updates to accurately reflect true market conditions and ensure a robust measure of execution efficiency.
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