Execution Practices for RFQs on Paradigm

Published On

October 26, 2021

Over the last 12 months, we’ve seen a ton of trading activity via our flagship MDRFQ product. As a result, we’ve observed a few best practices for executing large trades we thought would be worth sharing with the broader community.

When executing larger amounts, the question will always arise of whether to execute: (1) the full amount, paying larger spread to secure a risk transfer price & guaranteeing the execution rate or (2) splitting off the ticket into smaller sizes over time, paying a smaller spread initially, but opening the taker up for potential moves in the price.  

Determining which strategy will result in a better fill will always be dynamic based on underlying market conditions. The key in either scenario is transparency, pace of execution, and minimizing market impact. Please feel free to reach out to our 24/7 sales team which is here to help you source liquidity to the best of our ability in a neutral manner!

We would also like to highlight two forms of undesirable behaviors that destroy the integrity of the marketplace and worsens the executed fills of all participants. Paradigm has built protections to prevent and mitigate such actions to the best of our ability, which we describe below.

(1) Machine Gunning - lining up multiple RFQs of similar structures and executing them all simultaneously

Machine gunning erodes trust in the ecosystem:

(A) Market makers no longer can price taker requests as tightly as they could, given that the gross exposure of risk that they’re quoting is increasing without the opportunity to refresh their quotes based on prior market activity.  

(B) Market makers often have a set limit of the amount of live RFQs they quote.  Sending simultaneous RFQs of the same structure results in poorer pricing for the following quotes as not all makers participate.  Executing the first clip, before sending the second RFQ will result in better liquidity and execution prices.

Given that makers would like to price as tightly as possible, we encourage all market participants to send their RFQs one at a time, to avoid deterioration of liquidity in the ecosystem.

In addition, to encourage and foster better practices we’re enforcing a three-second rule between trades on a firm level hardcoded into both our API & GUI.

(2) Trading on Paradigm, then aggressively trading on the screen pushing prices higher or lower (i.e. running the market maker over)

Executing on Paradigm first, then trading on the screen creates a negative feedback loop. The taker receives a worse fill on the total balance versus trading the full amount on Paradigm due to the shallower depth of book on venue.  

This means that if the taker executes partially on screen, they would need to trade through multiple price levels to acquire their size, resulting in moving the screen reference price against themselves.  At the same time, takers will end up receiving poorer quotes as market makers become more defensive due to the potential of large negative mark to market incurred from the market impact from split execution.

To avoid orderbook disruption, please consider sourcing full liquidity on your remaining balances over Paradigm. Paradigm offers the best prices and deepest liquidity when trading larger amounts which will result in better fills and minimize reference price impact.

To discourage negative market impact to both our taker & maker clients, we will be closely monitoring for patterns undesirable to our ecosystem.

Thank you all for your continued support and feedback as we work together to continuously improve our product offering and ensure that Paradigm remains the leading provider of block sized liquidity. Thank you as well for your help in preserving the trust, transparency, and fairness that has helped our ecosystem grow.