A Tiered RFQ System in crypto institutional trading structures the Request for Quote process to prioritize and route trade inquiries to specific groups of liquidity providers based on predefined criteria. Its purpose is to optimize execution quality, enhance price discovery, and improve fill rates for institutional clients by leveraging differentiated relationships and liquidity capabilities among market makers. This system allows for tailored interaction with liquidity pools.
Mechanism
This system functions by classifying liquidity providers into various ‘tiers’ based on factors such as historical fill rates, quoted spreads, capital committed, or specialization in certain asset types or sizes. When a client submits an RFQ, the system first routes the request to the highest-priority tier. If insufficient liquidity or unsatisfactory pricing is received, the request escalates to subsequent tiers until optimal conditions are met.
Methodology
The strategic approach involves defining precise tiering rules based on objective performance metrics and ongoing evaluation of liquidity provider behavior. It necessitates robust communication infrastructure to manage the sequential or parallel routing of quotes and responses efficiently. This methodology aims to minimize latency, reduce market impact for large block trades, and provide clients with the best available pricing by systematically accessing a diverse network of institutional liquidity.
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