Winner’s gap refers to the difference between the actual execution price of an order and the best available price at the time of order submission, typically favoring the order placer. It is often observed in request-for-quote (RFQ) systems or opaque markets where the liquidity provider’s quoted price might be less favorable than the actual price achievable through immediate execution against the market.
Mechanism
The operational mechanism arises in RFQ systems where a client requests a quote for a specific trade. Dealers provide a price, and the client accepts. If, between the quote and execution, the market moves favorably for the client, the client effectively receives a better price than the dealer initially accounted for. This often results from latency, market volatility, or the dealer’s inability to perfectly hedge immediately.
Methodology
The methodology for minimizing the winner’s gap for dealers involves sophisticated pre-trade analytics, low-latency execution infrastructure, and dynamic pricing algorithms. Dealers aim to quote prices that accurately reflect real-time market conditions and their hedging costs, while minimizing the time lag between quoting and execution. For clients, strategic use of RFQ, combined with comparing quotes from multiple dealers and monitoring market depth, can help exploit this gap to secure better execution prices.
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