Top-5 Features of a Reliable Liquidity Provider

Liquidity is among the core characteristics of a brokerage company, as newer traders prefer to join brokers where their orders are about to be executed instantly. High spreads, gaps, and price slippage force traders to open accounts on other platforms.

What is the role of a liquidity provider?

The Forex market is known for its giant daily turnover – transactions worth more than $7 trillion take place within 24 hours; meanwhile, brokerage companies need the helping hand of large banks, hedge funds, and other giant players of the industry. Another problem appears – major players deal with huge volumes only.

This is why brokers need to apply to liquidity providers (LPs). Such companies set up liquidity pools that unite the largest companies involved in Forex trading. A brokerage company’s order book is connected to those liquidity pools, and orders placed by traders are instantly executed by market-makers. Brokers themselves get commissions from every deal, and such a model makes companies expect traders to open as many orders as possible.

Liquidity providers and market-makers: what’s the difference?

Newer business owners frequently call LPs market-makers, while those roles are entirely different in financial markets.

Market-makers are responsible for maintaining a certain market active through giant trading volumes. For instance, international banks, top-rated hedge funds, investment funds, and other players who buy and sell fiat currencies are the market-makers of the Forex industry.

Liquidity providers are third parties, playing the role of agents between brokerage businesses and market-makers.

On the other hand, brokers may select the market-maker model, applying to no LPs. The model shows that a broker’s order book consists of inner ask and bid requests only, and an inbuilt matching engine is looking for correspondences between placed orders. Do these brokerage companies fulfill traders’ expectations? The experts place an accent that an order book is broad enough when the overall number of signed-up traders is more than 1 million. Furthermore, many professional traders use fewer traded pairs – for instance, GBP/CHF is the 20th most trader pair with 0.73% of overall trading volumes. When a brokerage company connects no liquidity pools, traders face high gaps for trading pairs out of the top-10.

As such, A-book brokers (companies that connect order books to liquidity pools) provide their traders with better conditions.

Features of a reliable liquidity provider

Tens of companies are glad to connect your order books with liquidity pools. What are the top features that name a reliable LP? Here is the list of the most important characteristics to take into account:

1. Tier 1 Vs Tier 2 liquidity providers

LP companies are of two types:

• Tier 1 liquidity providers connect brokerage companies with the ECN network – the electronic system of bid and ask orders execution. ECN unites the largest market-makers (BNP Paribas, JP Morgan Chase, Barclays, Deutsche Bank, etc.).

• Tier 2 providers are also known as Forex prime brokers. A company opens an account in one or several banks and provides brokerage companies with access to such liquidity pools.

Furthermore, there is one more type of LPs – Prime-of-Prime providers that set up their own liquidity pools and connect those pools to as many market players as possible (OTC brokers, dark pools, Tier 1 banks, Prime brokers). This said PoP liquidity providers unlock access to the deepest pools.

2. Multi-asset liquidity

Brokerage companies are mostly associated with the Forex market; meanwhile, up-to-date trading platforms empower brokers with access to other markets (e.g., crypto CFDs, metals, commodities). Many brokers unlock the possibility to trade both fiat currencies and digital assets; this is why a company needs to deal with a liquidity provider that maintains various assets.

Referring to the previous feature, it is important to deal with PoP liquidity providers that set up one of the deepest liquidity pools for every asset.

3. Trading opportunities

Liquidity providers may offer different trading opportunities from the viewpoint of execution time, leverage options, number of trading instruments, etc.

Dive into each market to understand the advantages of a particular provider. 

4. Transparent conditions

Liquidity providers make money in different ways. Reliable companies set up fixed commissions charged on the basis of executed orders. Meanwhile, LPs may impose other fees on brokerage companies (e.g., fixed monthly fees).

While discussing your cooperation conditions, look through the commissions and other payments. Reliable LPs offer transparent conditions.

5. Connectivity options

Many providers deliver liquidity to MetaTrader 4 and 5 trading platforms, as those options lead the market. The fourth version of MetaTrader is chosen by more than 50% of FX brokerage companies, and 20% more brokers use MT5. What about other brokers? Reliable LPs offer multi-connectivity cross-connection to as many platforms as possible.

Liquidity is among the top characteristics of a brokerage company. When a business owner is thinking over how to start a Forex business, he (she) needs to compare LPs available on the market.