Electronic Bond Trading and RFQ Protocols

Buy a stock and you're typically hitting a continuous, anonymous order book where the best bid and offer are visible to everyone. Buy a corporate bond and, most of the time, that book doesn't exist — there may be no quote sitting anywhere for the exact bond you want. Instead, the standard way to trade it electronically is request-for-quote (RFQ): you tell a chosen set of dealers what you want to buy or sell, they each send back a price, and you pick the best one.

How an RFQ works

A client wants to sell $2 million of a specific corporate bond. On an electronic platform, they select a list of dealers (say five) and send an RFQ — an electronic message specifying the bond (CUSIP or ISIN), size, and side (buy or sell). Each dealer sees the request and has a short window, often 30 to 60 seconds, to respond with a firm price. The client sees all responses and can trade with the best one, all electronically, with no phone call required.

Worked example

A portfolio manager needs to sell $5 million of a BBB-rated corporate bond and sends an RFQ to four dealers on an electronic platform.

1. Dealer A bids 97.80, Dealer B bids 97.95, Dealer C bids 97.65, and Dealer D declines to quote (perhaps because it has no interest in that risk right now).
2. The platform displays all three responses to the client within the response window; the client hits Dealer B's bid of 97.95.
3. Compared to calling a single dealer, who might have quoted 97.70 without competitive pressure, the RFQ process captured an extra 0.25 points — on $5 million face, roughly $12,500 — simply by making dealers compete for the same trade at the same instant.

Larger or more sensitive trades sometimes use a narrower list (fewer dealers) or an anonymous "all-to-all" protocol instead, to avoid signaling a large order to the whole street before it's done.

What this means in practice

RFQ platforms like those used across corporate and government bond markets have made electronic trading dominant even in a market that will never look like an equity order book, because they solve the actual problem — most bonds trade too infrequently to support continuous two-sided quotes, but competitive price discovery for a specific trade at a specific moment doesn't require one. Traders choosing how many dealers to include in an RFQ face a real tradeoff: more dealers usually means better pricing, but also more information leakage about the pending trade, which can move the market against the client before the trade is even done.