RFS vs RFQ
May 24, 2007
Waratah comments on LH’s use of RFS rather than the RFQ model used by Bloomberg, TradeWeb & BondVision. RFS is preferred because “the banks feel this is the fairest method for both sides of the market”. One can’t help suspecting a degree of self interest on the part of dealers in opting for RFS – surely it can’t all be for the benefit of the buy side ?
With an RFQ, a client is offered a firm, executable price that is good for the “wire time”: three seconds in the case of Bloomberg. If the client clicks hit/lift during the wire time, the trade is done at that price – no ifs and buts. With RFS, the client clicks on a price, which then goes back to the dealer for a last look. The dealer may reject the trade at that point. Does that favour the client or the dealer ?
May 25, 2007 at 8:13 am
Yep, it is amusing that LH says it is the fairest system. I’d agree if the price was firm and thus centrally matched. But as it stands…….
May 30, 2007 at 12:06 pm
I’ve worked on RFS based systems in the past.
Market makers are willing to provide more reasonable quotes (narrower bid/ofrs, larger size) if they aren’t ‘held’ on the quote.
The process is self correcting in that the buyside will be reluctant to to go to an MM who frequently walks away from his quotes.
June 1, 2007 at 7:16 pm
It’s a real shame that the last look is there as it presents an absolute reduction in the certainty of execution buyside can have when submitting the execution request ( see http://mostly.wordpress.com/2006/09/28/certainty-of-execution/ ). As the sellside terms of business generally (+rightly) allow for anything ‘off market’ because of tech problems or the like to be backed out or at least amended to market, and sellside’s control over enablements and reviews of their customer activity can weed out any snipers, is anyone going to argue any technical reason for keeping this last look in the transaction workflow, especially when it is not present in other asset classes?
June 2, 2007 at 7:41 pm
I believe it’s for technical reasons related to how the LH infrastructure throttles a stream of quotes sent by a dealer in response to an RFS. Since an updated price may be throttled it may not be shown to the client. So unlike an RFQ system, a dealer can’t be completely certain which price from their stream is being shown to the client – hence the need for last look.
January 5, 2009 at 10:38 pm
[...] is interesting since it could be used from the perspective of RFQ/RFS. If you consider “negotiation” as detailed here, then it probably wouldn’t be [...]