Choosing the right Liquidity Provider
A liquidity provider is an individual or institution which acts as a market maker in each asset class. This means that the liquidity provider will act as the both the buyer and seller of a particular asset, thus making a market. For instance, many stock exchanges have liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers make the commit to providing liquidity in the hopes that they will be able to make a profit on the bid-ask spread.
The importance of liquidity in Forex trading is clear to see since it is a key factor in being able to make a trade profitable. Having greater liquidity in a financial market enables an easier transaction flow and makes pricing more competitive. Liquidity providers (LP) need to have clients to stay in business. The clients also need the liquidity providers to remain in business. It is a symbiotic relationship. However, it is important for brokers to understand what their own in-house needs are and how they can select the best liquidity provider to fill these needs.
Who Provides Liquidity to the Forex Market?
A liquidity provider is a market broker or institution which acts as a professional market maker, working at both ends of the currency transactions.
Several types of market participants provide liquidity to the forex market thereby increasing the forex liquidity volume. These include central banks, major commercial and investment banks, hedge funds, foreign investment managers, forex brokers, retail traders and high net worth individuals.
Unless you are a massive whale, as a retail trader you will never directly deal with a Tier 1 liquidity provider but will instead deal with a brokerage or prime brokerage that has an established relationship with one or more Tier 1 liquidity providers. Tier 1 Liquidity providers will only enter to relationships with institutions and individuals they know to be financially sound, in order to reduce their counterparty risk. Many of the offshore brokerages that don’t have a physical presence and no past relationships deal with other brokers and prime brokers to gain access to the Tier 1 LPs.
What to Consider When Choosing a Liquidity Provider
In order to source the best liquidity provider, brokers need to assess their own specific needs and address several factors. Primarily, a broker should look at the overall package on offer relating to what assets and the kind of liquidity being provided. It is essential that multi-asset liquidity is provided by the liquidity provider together with access to the FIX protocol and historical data.
- Reputation of Liquidity Provider
Before choosing a Liquidity Provider a broker has to check if the LP is regulated. Also, the trustworthiness of the regulator should be verified. It’s advised to choose a public listed company as the LP. The broker will be able to check all the reports, financial stability and condition of the potential partner.
- The offer
What does the liquidity provider offer? What are the assets and what kind of liquidity is provided? Will the LP provide liquidity across several assets as well as access to a deep order book? Nowadays, traders demand more from their brokerage platforms in terms of being able to trade multiple assets across several asset classes. Therefore, multi-asset liquidity to trade FX, commodities, index futures, spot metals and equities should be provided by the LP. The LP should also be able to provide the brokerage access to the FIX protocol and historical data.
- Executions & Pricing
The hallmark of a LP in terms of trade execution is being able to offer fast executions with requotes or slippage, especially during releases of high impact market news. The price offering must include spreads which are competitive as well as low commissions and swaps. There must be a balance between saving money in terms of getting cheaper costs and quality of the service provided.
The Liquidity Provider should be able to offer data feeds which are stable and reliable. Price feeds must be reflective of real-time prices from all relevant exchanges as well as the interbank forex market. Access to historical market data and the tick data is an essential part of the solution as well as complete order book presented via FIX protocol or trading terminal offered by the LP.
- Bridge & Hub Technology
The most efficient way to manage all the LP’s is to use a reputable hub which can provide detailed reporting and aggregation tools as well as Risk Management Tools.
Our Forex Liquidity
Our network of existing liquidity providers includes prime brokers and specialised liquidity providers, offering single and direct market access to Tier-1 FX liquidity venues and empowering businesses with unmatchable levels of technology, deep liquidity and speed of execution at ultra-competitive trading costs.
We do not deal with any secondary brokers offering liquidity, only pure liquidity providers. Many liquidity providers simply use liquidity from other brokers as their source of prices and volumes. This means that depth can sometimes be misleading due to duplication of liquidity which can lead to rejected orders when you need to trade. Some liquidity providers also take the risk on themselves, often referred to as a “B” book, and don’t straight through process flows, leading to counterparty risk and conflict of interest. We only deal with Pure Liquidity providers such as Equiti Capital, CFH, GMI, GBE which all are connected to Tier 1 banks as seen below:
We offer fast, fully automatic and reliable execution in the MT5 environment through our Aggregator hub and Risk Management System, with ultra-low latency and a multi-asset feed. Our solution automatically controls even the smallest trades, solving many B-Book problems experienced with scalpers and high-volume traders. Our Smart B-Book solution also significantly decreases operational costs, as less dealers are required for flow control.