What Is the Primary Risk Component That RFQ Size Helps Market Makers Manage?
The primary risk component is execution risk, specifically the risk of slippage when the market maker attempts to hedge or unwind the resulting position. A larger RFQ size, especially for illiquid assets, ensures the trade is worthwhile despite the potential cost of slippage.
It also helps manage inventory risk by making the trade large enough to be economically efficient.
Glossar
Market Makers
Function ⎊ Market Makers in cryptocurrency, options, and derivatives markets actively provide liquidity by simultaneously offering to buy and sell assets, narrowing bid-ask spreads and facilitating efficient price discovery.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Inventory Risk
Exposure ⎊ The core of inventory risk within cryptocurrency derivatives, options trading, and financial derivatives stems from the potential for losses arising from unhedged positions or imbalances between assets and liabilities.
Execution Risk
Exposure ⎊ The inherent risk in cryptocurrency, options, and derivatives trading stems from the potential for adverse outcomes arising from the imperfect execution of an intended trade.
RFQ Size
Specification ⎊ ⎊ Request for Quote size, within cryptocurrency derivatives, denotes the nominal value or quantity of the underlying asset referenced in a specific option or forward contract being quoted.