The Role of Liquidity Providers in the Brokerage Business

The Role of Liquidity Providers in the Brokerage Business

In the hierarchy of liquid financial markets Forex heads the ranking, as fiat currencies are assets of absolute liquidity. That means a holder may buy and sell them at market prices at any time. Many newer traders and brokers take the above-mentioned into account, making their first steps in Forex and face losses. Which important pitfalls should a beginner understand about Forex liquidity?

Liquidity and array of trading pairs

Forex traders use different trading pairs, buying and selling assets to get profits from price differences. As for the top-3 most in-demand pairs, they are EUR/USD (20.03% of the overall market volumes), USD/JPY (13.98%), and AUD/USD (9.14%). 13 more pairs contain from 7.59% to 1.82% of trading volumes. This said the less popular a trading pair is, the lower the number of traders is observed.

As for brokers, some newer players rely on their own liquidity, playing the role of market makers. What does it mean? A broker unites bid and ask prices of traders who have signed up to a platform. While talking about the most popular trading pairs, troubles may not happen but the liquidity of a broker is undoubtedly not sufficient to execute orders for trading pairs that are outside the top-10. Traders face the situation when their orders are not executed by market prices, price slippage occurs, and users decide to choose another platform for trading.

The role of a liquidity provider

The Forex market is grounded on market makers (MMs) – i.e. major players that buy and sell large blocks of currencies. Banking institutions, hedge funds, investment funds, and other players fall into this category. Market makers keep the FX market active, and newer brokers may connect their businesses to those institutions. Of course, they cannot access market makers directly but liquidity providers (LPs) are bridges between brokers and MMs.

The role of liquidity providers is straightforward but exceptionally important – such companies help a brokerage company to execute all the orders instantly, as the order book is about to be connected directly with market makers. Major players execute all the ask and bid requests by market prices no matter which trading pair traders use.

LPs are numerous enough, and beginner brokers frequently have no idea which brokerage companies to choose.

Which liquidity providers are the best ones?

In the search of the best liquidity providers, brokerage companies need to take the following two aspects into account:

1) Tier 1 providers are much more effective than Tier 2 LPs.

2) First, compare conditions that Tier 1 providers offer to choose the best one.

Tier 1 providers are LPs of the first level, connecting brokers to a large pool of liquidity where Barclays, JP Morgan, HSBC, UBS, and other major players are represented. As such, a brokerage company’s order book is linked to trading volumes worth billions of dollars. Tier 2 providers connect a broker with one certain bank or several institutions.

If we compare conditions Tier 1 providers offer, take the following important aspects into account:

1) The number of trading pairs. For instance, B2Broker provides brokers with the highest liquidity for 80 trading pairs.

2) The time required for order execution. Reliable LPs offer an order execution from 12 milliseconds.

3) Zero spread. There should be no difference between ask and bid prices.

Furthermore, trustworthy brokers guarantee 24/7 technical support for brokers, being ready to solve troubles and headaches.

This said the role of liquidity providers is crucial from the viewpoint of a broker’s success. Reliable LPs offer your traders the best conditions, convincing them to remain loyal to your platform. B2Broker is the leading solution on the Forex liquidity market.