A request for quote (RFQ) is a way of trading in which a market participant asks one or more dealers to quote a price for a specific instrument, size and direction, and then chooses whether to trade on one of the answers. It is the usual method for instruments that trade too rarely, or in sizes too large, to be matched continuously on an exchange. Asset managers, pension funds, corporate treasurers and banks use it to trade bonds, derivatives, foreign exchange and large blocks of exchange-traded funds.
RFQ sits between traditional over-the-counter dealing by telephone or chat and the anonymous central limit order book used by stock exchanges. It keeps the dealer relationship of the former but adds electronic competition, time stamps and an audit trail. In the European Union and the United Kingdom, RFQ systems are recognised as a trading model under MiFID II.
How an RFQ works
A typical electronic RFQ follows a short sequence:
- The requester enters the instrument, the quantity and, on most platforms, whether it wants to buy or sell. Some platforms allow a request for a two-way price so that the direction is not revealed.
- The requester selects the dealers that will receive the request, commonly between three and five, although "request for market" and all-to-all protocols can reach many more.
- Each dealer responds with a firm or indicative price within a set time, usually seconds to a few minutes.
- The requester accepts the best quote, and the trade is executed with that dealer. The other quotes lapse.
- The platform sends the trade details to both sides for confirmation, reporting and settlement.
Only the requester sees all the quotes. Dealers do not see each other's prices, though some platforms tell the losing dealers how close they came.
Where it is used
RFQ dominates electronic trading in corporate and government bonds, where there are far more individual securities than in equities and most trade only occasionally. It is also widely used for OTC derivatives such as interest rate and credit swaps, for foreign exchange forwards and swaps, and for large orders in exchange-traded funds that would move the price if sent to the order book. In each case a market maker commits its own capital to take the other side.
The same idea has been adopted in digital asset markets. An OTC desk quotes prices on request for large crypto trades, and some decentralised trading protocols route orders to professional market makers through an RFQ step rather than through an automated pool.
Advantages and drawbacks
For the requester, the main benefit is competition without wide disclosure. Putting several dealers in competition tends to narrow the bid-ask spread paid, and limiting the request to a few dealers reduces the chance that news of a large order spreads and causes market impact. The electronic record of competing quotes also helps firms show that they met their best execution duties.
There are trade-offs. Every dealer asked learns something about the requester's intentions, and a losing dealer may adjust its own prices or positions, a problem known as information leakage. Asking more dealers improves competition but increases the leakage, and dealers who expect to face many rivals may quote less aggressively because the winner is often the one that mispriced the trade. RFQ also contributes less to public price discovery than an open order book, because quotes are private and only completed trades are published.
Regulatory treatment
Under MiFID II, RFQ is one of the recognised types of trading system, alongside continuous order books, quote-driven systems and periodic auctions. A venue that operates one may be a regulated market, a multilateral trading facility or an organised trading facility, and it is subject to pre-trade and post-trade transparency rules, with waivers and publication delays for large or illiquid trades. A dealer that responds to client requests outside a venue on a frequent and substantial basis may be classed as a systematic internaliser.
In the United States, the Dodd-Frank Act required certain standardised swaps to be traded on swap execution facilities, where an RFQ for those swaps must be sent to a minimum number of dealers. Completed trades are subject to trade reporting in both regions.
Comparison with other protocols
In a central limit order book, anyone can post or hit a price, and trades are matched by price and time. In continuous trading of this kind, liquidity depends on standing orders being present. RFQ instead creates liquidity on demand for one trade at a time. A block trade negotiated bilaterally involves a single dealer, while streaming prices from a single dealer remove the competitive step altogether. Many platforms now offer several of these protocols side by side, and firms choose according to size and liquidity.