RFQ (Request for Quote) is coming soon to PowerTrade!
But what is RFQ, and how are they used?
To understand RFQ, you first need to understand what block trading is.
What is block trading?
Block Trading is an over-the-counter (private) trading used for large transactions ($100,000 & up) in which investors can buy or sell assets in large blocks without causing market price movements.
How does RFQ fit into this block trading?
When executing larger orders on an exchange, because there is a public order book, if you tried to complete the transaction, it could cause a price slippage. But on the other hand, via private negotiations, you can reach a predetermined price using a request-for-quote from a market maker.
What is an RFQ?
A request for quote (RFQ) is a system that helps notify market makers when investors want to make a large block trade. The system allows them to bid and ask for the requested strategy they will be implementing.
Block Trading Explained:
Now that you have had a quick run down of block trading and RFQ let's take a closer look at block trading and why it is used to prevent price slippage.
Let's first break down the definition of block trading. Block trading is a type of over-the-counter trading used to sell a vast number of shares, derivatives, or cryptocurrencies without affecting an underlying asset's market price. These large block trades are used by institutional investors, hedge funds, and other high-worth investors.
What do they mean by over-the-counter (OTC)? OTC is also known as "off-exchange" trading, which is done directly between two parties without the supervision of an exchange. OTC trading contrasts with the standard exchange trading, which occurs via the exchange order book (a list used by exchanges to show outstanding by and sell orders).
So why are these block trades made OTC instead of on the exchange? Generally, if you put in a large order on the exchange, it will show up on the public order book, which anyone would be able to see. Since anyone can see if a large order has been placed on the order book, many other investors, if they see a large sell order, will short-sell so they can profit from the anticipated price slippage.
What is price slippage?
Price slippage is the movement (up or down) of an asset's price based on the actions of a trader. Price slippage occurs when a market is not liquid enough to take on a large buy or sell order at its current price.
For example, an institutional investor wants to sell 1,000 BTC at exactly $30,000. If they were to submit such a large order on a standard exchange order book, their sell order would take up all the bids at 30,000.
On the other hand, if they decided to do a market order, their order would most likely fill at lower and lower prices until finalized. While if they had used a limit order, it would possibly only execute partial order.
In this example, when the institutional investor submitted their vast 1000 BTC sell order, other traders would see it on the order book and prompt a selloff. Others would also short-sell BTC in anticipation of the price going down further due to the price slippage. This huge transaction would result in a considerable price slippage, which would lose the investor a significant amount of money.
In general, these large asset sales would almost always create price slippage. Thus block trading is implemented for large investors to help negotiate a price and avoid price slippage. When negotiating a block trade, a discount from the current price is given when selling or a premium higher price when buying. This discount or premium allows the market maker to take the trade and make a profit.
Block Trading allows high net work investors to covertly execute large trades without prompting a market response that would cause price slippage. Block trading allows investors to transact large trades at a better price than on an exchange and allows a margin for market makers to make a profit.
The block trades are executed using an RFQ (Request for Quote) System that helps matching investors with market makers. Market Maker is notified once an RFQ is sent and will be prompted to give a bid price and ask for the request strategy the investor would like to implement.