Running a multi-dealer quote process for crypto derivatives: the mechanics that keep spreads honest

The most expensive line item in a derivatives overlay programme is not the premium. It is the bid-offer spread, compounded across every roll and every new trade over the life of the programme. A single-dealer relationship maximises that spread. The multi-dealer quote process is the only reliable mechanism to compress it.

The single-dealer problem

A single-dealer quote is not a price. It is an offer, set at the level the dealer judges the client will accept. Without a competing quote, the client has no information about where the market is, and the dealer has no incentive to provide a tight one. Over a rolling book, the aggregate spread on a single-dealer programme is systematically wider than on a multi-dealer one.

The counterargument is relationship credit: preferential terms in exchange for flow exclusivity. In practice, the terms on a single-dealer relationship narrow over time as the client's leverage (the credible threat of moving flow elsewhere) decreases. A client who has not cultivated a second dealer has no credible threat and no basis for the negotiation.

The process

A standard multi-dealer quote process for an OTC crypto derivatives trade runs as follows. The terms of the trade (instrument, tenor, notional, structure) are described in a request sent simultaneously to a minimum of three dealers. A response window is set, typically one to four hours depending on instrument complexity. Quotes are received and compared on a consistent basis (mid to mid, not offer to bid). The trade is executed with the tightest mid. The second-tightest quote is archived as the reference mark.

The request should not name the other dealers receiving the quote. It should specify the response window and the required format. Dealers who consistently provide wide or non-responsive quotes are rotated out of the panel; the rotation decision is documented.

What to archive

For each trade: the request, the responses, the selected quote, the spread between the tightest and second-tightest quotes, and the name of the executing dealer. This archive answers the auditor's question (did we get a competitive price?) and provides a reference mark in any subsequent valuation dispute. It also generates the dataset for evaluating dealer panel performance over time, which is what allows the rotation decision to be made on evidence rather than relationship inertia.

Policy language

The multi-dealer quote requirement should appear in the derivatives policy as a specific procedural requirement, not as a general principle. The language should specify the minimum panel size, the required response window, the archiving standard, and the conditions under which a single-dealer execution is permissible (for example, very short-dated rolls where delay is costly, with a post-hoc reference mark required). A general principle stating “competitive pricing should be sought” is unenforceable. A specific procedure is auditable.