How do Liquidity Providers Make Money?
Sep 9, 2021
Forex is a marketplace with a daily turnover of more than $7 trillion, and newcomer traders get opportunities to capitalize on buying and selling assets. Private traders cannot access the marketplace directly – brokerage platforms act as mediators. As for FX brokers which grow in number steadily they need “help” as well – liquidity providers (LPs) make it possible to fulfill traders’ orders.
Are liquidity providers a must-have partner for a Forex broker?
Brokerage companies are roughly divided into two categories:
1) FX brokers who act as market makers;
2) FX brokers that deal with LPs.
Companies from the first category rely on their trading audiences, as signed-up users maintain liquidity by placing orders. While talking about top trading pairs, traders may get their orders closed at market prices. As for less popular pairs, gaps, slippage, and high spread appear. Traders cannot fulfill all the placed requests.
FX liquidity providers connect brokerage companies and market makers (BNB Paribus, JP Morgan, and other institutions); this is why orders placed by traders are executed by the largest banks and funds.
Expenses of brokerage companies. Ways liquidity providers make money
A newer brokerage company tries to cut expenses as much as possible, and a business owner faces the necessity to deal with top liquidity providers. What are the expenses of a broker?
1) Spread and swap;
2) Additional fees.
What is the spread? Such a term is used to mark the difference between bid and ask prices. For instance, the most reliable providers offer spreads from 0. The less popular a trading pair is, the higher the spread index grows.
For instance, the EUR/USD is the most traded pair in the Forex market, and reliable LPs offer spreads starting from 0. That means no difference between bid and ask prices (1.18141 and 1.18141). As for less demanded pairs (e.g., GBP/JPY), spreads grow to 0.015 or even more (bid price is 151.504 and ask price is 151.519).
Spread indexes are not something fixed – they frequently change, depending on market activity; meanwhile, top providers make those changes almost invisible for a trader.
While talking about fees, some LPs charge commissions from a broker for letting a company access the world’s largest liquidity pools. Those fees are imposed from the overall trading volumes.
When a brokerage company understands ways how does a liquidity provider make money, it is a challenging task to meet a reliable partner.
B2Broker company provides minimum spreads for more than 70 FX trading pairs, while an order execution takes from 12 milliseconds. On top of the FX spot market liquidity, B2Broker supports margin trading, offering leverage multipliers up to 100:1.
All payments are transparent and discussed at the beginning of the partnership. The company never charges hidden fees, as B2Broker wants partner businesses to develop and reach new highs.