RFQ And Request-For-Quote Execution

Central limit order books work well when there's a continuous stream of participants willing to post two-sided quotes at all times, which is true for liquid equities and futures but not for most bonds, many FX pairs, or most swaps, where the specific instrument a trader wants might not trade more than a few times a day. For markets like these, the dominant execution protocol isn't posting an order and waiting — it's asking specific dealers directly for a price.

Asking instead of posting

In a request-for-quote (RFQ) protocol, a trader who wants to buy or sell sends a request specifying the instrument and size to a chosen set of dealers (often three to five), and each dealer responds with a firm, executable price. The trader then chooses whether to trade with the best responder, and at what size — some platforms allow trading with multiple responders to split a large order, others are winner-take-all. This differs fundamentally from posting to a central book: in RFQ the trader controls exactly who sees the request, the request disappears once answered rather than resting visibly, and dealers know they're in direct competition with a small, named group rather than an anonymous crowd.

The trade-off is the classic one for any negotiated protocol: RFQ gives the trader control over information disclosure and typically a firm, certain price, but exposes the trader's intention to each dealer asked — a dealer who doesn't win the trade still knows a client wanted a specific size, which can leak into how that dealer prices the next client.

Worked example: comparing quotes across five dealers

A trader needs to sell $10 million face value of a corporate bond that trades only a handful of times a day, making a central order book essentially useless for this size. The trader sends an RFQ to five dealers simultaneously. Responses come back as bids: 98.20, 98.15, 98.30, 98.05, and 98.25 (percentage of face value). The best bid, 98.30, is chosen, and the trade executes immediately for the full $10 million — a firm, certain fill in one transaction. Had the trader asked only one dealer, common practice for very sensitive trades, they would likely have received a worse price, since that dealer faces no competitive pressure; the trade-off is that five dealers now know a $10 million seller was in the market, which can affect how each prices the next client's request in this bond.

What this means in practice

RFQ remains the dominant protocol in most fixed-income and swap markets and much of FX, precisely because those markets lack the continuous two-sided liquidity that makes a central order book effective — electronic trading has largely moved bond and swap trading onto electronic RFQ platforms rather than order books. The number of dealers asked is itself a design choice: more dealers generally improves the price through competition but increases leakage, which is why traders widen the dealer list for routine trades and narrow it sharply for sensitive or unusually large ones.