What You Should Know About Energy Liquidity?
Nov 16, 2021
Since the beginning of 2021, the energy market has jumped by 245.8%, opening new opportunities for investors. Energy instruments are characterized by higher volatility when compared to more traditional assets like Forex or equities. This is why energy liquidity plays one of the most important roles for buyers and sellers.
Which instruments does the energy market include?
First and foremost, newcomer investors need to know which instruments the market includes. Despite the explosive growth of renewable energy, oil and gas are still the two core market players that impact the industry. Investors buy and sell the following instruments: WTI (US Oil), BRN (Brent Oil), and NGS (Natural Gas).
Let’s dive into the given instruments to understand the importance of liquidity, and how the notion influences the energy market.
Energy trading volumes: comparison to other markets
The FOREX market is characterized by daily trading volumes over $7 trillion. The situation in the crypto market is favorable for buyers and sellers as well – 24 h trading volumes are about $120-150 billion.
From this viewpoint, the energy market seems to be among the industries with low liquidity. WTI average trading volumes vary from $2.2 billion to 3.6 billion. Volumes for BRN and NGS are even lower; this is why companies offering such instruments need to connect to a deep liquidity hub.
What is the role of a liquidity provider in the energy market?
The energy market primarily includes large market players that buy and sell assets in the over-the-counter space. As for smaller investors, bid and ask orders frequently do not correspond with each other from the viewpoint of prices. This is why companies cannot offer traders competitive conditions while acting as market makers themselves.
Order books should be connected to firm liquidity pools that include the largest market players and OTC players.
What do buyers and sellers get? With the giant trading volumes, spreads are minimum; this is why investors can buy and sell energy instruments by market prices. Low liquidity leads to price slippage, gaps, and investors lose their money as a result.
How to choose the best liquidity providers?
While talking about more traditional markets like Forex or cryptocurrencies, the array of liquidity providers (LPs) is big enough, and brokerage companies compare the given conditions to understand which companies to deal with.
With lower trading volumes energy instruments are less demanded among LPs. Meanwhile, a company needs to take offered conditions into account. Look through the list of available energy liquidity providers and compare the following conditions:
1) The number of available instruments. Top-rated LPs cover the needs for the following instruments: WTI (US Crude Oil), BRN (Brent Crude Oil), and NGS (Natural Gas). All the given instruments are traded to USD.
2) Spreads. The lower spreads are – the better conditions buyers and sellers get. The best LPs offer spreads from $0.01 for energy instruments. Spreads may change reacting to the current market situation.
3) Liquidity venues. Reliable providers unlock 7 liquidity venues to provide trading platforms with the best conditions.
4) Margin requirements. The energy market is primarily understood as the spot one; meanwhile, buyers and sellers prefer to activate leverages to increase their chances for high profits. Top-rated LPs offer leverage options up to 1:50. Furthermore, the best providers make it possible to manage multiple financial instruments from one margin account.
5) Technical support. Reliable providers always provide their clients with high-level technical support around the clock to remove all the troubles and headaches when those happen.
What is the Prime-of-Prime liquidity?
PoP liquidity providers create ultra-competitive conditions for brokerage firms, banks, funds, and other investment companies. A firm builds up its own liquidity pool, connecting all the largest market participants. As such, buyers and sellers access the best liquidity ratio – their orders are executed instantly by market prices, while spreads are close to 0. This is why PoP providers are the best choice to connect an order book to.
How to connect a liquidity provider?
When you’ve compared conditions suggested by liquidity providers for energy market instruments and come with the final decision, send your application to the chosen company. For instance, B2Broker is the world’s leading PoP liquidity provider with ultra-competitive conditions.
Brokerage companies or WL partners are connected to LPs through FIX APIs, and the whole procedure takes about 5 minutes.