Thursday, July 5, 2012

RFQ ^ limit order ^ pseudo limit order

The dominant protocol of quote distribution is different between markets. Limit order and RFQ are well understood. As to of pseudo limit orders, there are 2 types --
- firm quotes invite market takers to click-and-trade, and are automatically executed (or rejected) by the dealer's system
- Indicative quotes invite market takers to send RFQ.
* Which mode is dominant on an ECN? I guess firm quotes.

Note true limit orders are only available on a real exchange with a clearing house, which has real power/fund of execution. See http://bigblog.tanbin.com/2012/07/unlike-exchanges-ecns-have-only-partial.html

Note "dealer" means the same as "market maker" in this context. Usually a dealer keeps inventory. He can sell short but usually for a short durations.

Here are the dominant protocols --
* On exchanges -- limit order. Be it equity, futures, listed options...
** for large block trades, I guess it's RFQ, sent in private.
* equity ECNs -- no limit order.
* institutional FX spot -- 1) pseudo limit orders 2) RFQ for large orders (25+ mio). No enforcement/guarantee by ECN. Dealer always gets a last look
* institutional bond market -- 1) pseudo limit order 2) RFQ
* institutional OTC equity option market -- RFQ. Pseudo limit order are unheard-of
* Treasury -- pseudo limit orders and RFQ
* IRS -- 1) RFQ 2) pseudo limit orders. Most trades are large, so RFQ dominates.

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http://www.linkedin.com/in/tanbin