RFQ Trading: Gaining Liquidity Access with Sophisticated Protocol

The financial market post-2008 crisis has become more complex under the new regulation, with stricter measures of transparency levels and reporting standards. Many investors were facing substantial challenges in accessing liquidity without influencing price quality by posting bids or offers, especially for larger size trades or less liquid assets. With the whole system under scrutiny, some businesses have moved into the Request-for-Quote (RFQ) system; a trading tool that enables buyers to send quotes to multiple sellers on a regulated venue. Such technology offers buy-side the opportunities to gain control over order execution, rather than waiting for the sell-side to deliver.

RFQ intrinsically brings the traditional auction-like processes of assets onto electronic platforms and offers price discovery for more competitive pricing while streamlining trade workflow. By routing workflow electronically, this method does not only allow market participants to achieve best execution, but also minimise information leakage of their orders in the market. Market makers and participants are perpetually gaining the opportunities to improve operational efficiency and engage larger amounts of liquidity by leveraging technology, while fulfilling reporting and compliance requirements.

A report from Liquidnet’s The New Execution Champions series shows a distinguishable shift in buy-side towards technologies that offer full control over best execution such as RFQ. Platforms like Tradeweb allow market participants to execute larger ETF orders on a disclosed-request based system, with others such as The London Stock Exchange Group (LSEG) and agency broker Instinet. As there are more players introducing RFQ technology, the market is unlocking possibilities for higher liquidity access on a wider spectrum of assets including more relatively illiquid one such as commodities and energy.

Hydra X’s RFQ Module for electronic OTC venues offers businesses, brokers and exchanges an electronic trading hub for discovery and execution of off-exchange transactions across a wide variety of assets. This module enables users to automate existing voice- and chat- broking services, and electronically capture trade confirmations and records to meet best execution and compliance requirements. Further, both anonymous and directed tradings are available, offering choice and control over price discovery and counterparty selection for users to achieve their trading goals.

With a growing number of investment in assets such as ETFs and other illiquid assets, the adoption rate of RFQ trading seems to accelerate in upcoming years; the market needs tools with better access to liquidity, high levels of transparency and reporting standards that meet the industry’s compliance requirements.

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