Tiered Quoting, in the domain of crypto Request for Quote (RFQ) and institutional options trading, describes a pricing strategy where a market maker or liquidity provider offers different bid and ask prices for varying trade sizes or order depths. Its purpose is to manage inventory risk and capital exposure more effectively across different liquidity demands.
Mechanism
The mechanism involves dynamically adjusting the spread and price levels based on the quantity requested in an RFQ. For smaller sizes, tighter spreads and more aggressive prices are offered. As the requested size increases, the spread widens, and prices become less favorable, reflecting the higher risk and potential market impact of executing larger block trades. This is often automated through algorithmic pricing engines that consider real-time market conditions, inventory levels, and risk limits.
Methodology
The strategic methodology behind tiered quoting aims to optimize profitability and risk management for liquidity providers in institutional crypto markets. It allows market makers to quote competitively for smaller, frequent trades while appropriately pricing the risk associated with larger, less liquid transactions, thereby attracting diverse order flows and maintaining capital efficiency in their options trading and RFQ operations.
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