How Do Market Makers Determine the Price They Offer in an RFQ?

Market makers calculate their RFQ price by using a reference price from a liquid underlying market and then applying a spread. This spread is determined by several factors: the size of the requested trade, the volatility of the asset, the market maker's own inventory risk, and the cost of hedging the position.

They use sophisticated algorithms to continuously update these inputs, allowing them to provide a competitive, firm quote that reflects both the current market conditions and their own risk appetite, while also including a margin for profit.