Re-imagining Request For Quote
Background
The Request For Quote (RFQ) process is used in areas as diverse as Equity Derivatives, Mortgages & Car Insurance alternatively it is common in any process that uses a Broker. Here a customer will ask a broker to get a price for some standard product. The Broker will ask a set of Market Makers for their best price for that product and once returned, the Broker will select the “best” price and pass it on to the Customer. The Customer then accepts that price and the deal is agreed.
The finer points of the deal are different depending on the asset class for example in Equity Derivatives
the identity of the customer is only revealed to the market makers if they win
the size or volume of the trade may be hidden
how the “Best” price is selected is potentially tightly regulated by MIFID II Best Execution regulations.
The challenge here is twofold:
Platforms that manage the process become a critical piece of market infrastructure with all the trust and risk implications that that entails and
As the market makers are usually competing with each other for business strict data confidentiality is critical.
The Project
Distributed Ledgers (DLT) which use private blockchain technology are a good candidate for managing the interactions between the stakeholders as they fundamentally minimise the role of the central platform. The Digital Asset Platform was selected as the DLT platform so that this critical infrastructure could be distributed and it manages the distribution of data in a very clean way. The full stack consisted of:
DAML - encoding the rules of the process
MySQL - operational data store at each node
ASP.Net Core - website for the front end at each node
Python - auto quoting functionality
The Outcome
The successful Proof of Concept demonstrated the following:
How the Digital Asset Platform minimises the Broker role (rather than fully disintermediating it) and forces the broker to focus on the truly valuable parts of the process (e.g. the Broker’s knowledge of the Market Maker landscape rather than the repackaging of the best quote to go back to the customer).
How data visibility and expiry functionality in the platform can tightly manage the process.
How placing the Best Execution logic on the ledger removes the need for all brokers to demonstrate that they are MIFID II compliant in that regard.