Cooperation with a quality liquidity provider is an important issue that a broker must solve at the initial stage of starting a brokerage business. Because this partner is able to guarantee fast and high-quality execution of orders. This approach allows the trader to quickly complete a trade, avoiding price slippage and losses. It also improves the platform’s reliability and reputation.
Therefore, it is important to learn more about all the features of the liquidity aggregator before brokerage business. Having knowledge and understanding allows you to avoid mistakes at the initial stage, win the fight for the client and create your own exchange with maximum efficiency. Let’s take a look at the role of market makers and liquidity providers in the markets, as well as find out the key differences between these players.
Basic Principles of the Forex Market
Forex is an open marketplace where each user can conclude a deal by buying, selling, or exchanging currency. But the Forex market is regulated, and you cannot enter into incomprehensible transactions here. A member must purchase currency from another designated member. This is why Forex partners with third parties (investment funds, large banks, hedge funds, etc.). All of these organizations can influence the liquidity of an asset. Therefore, they are called market makers.
Features of Market Makers
The meaning of market makers can be understood from the name. These are the players who “create the market.” These are the participants who are the backbone of the Forex market. Various financial institutions, large banks, funds, etc. have a huge pool of liquidity (both popular and unpopular currency pairs). All this allows maintaining a high level of liquidity and satisfying any, even the largest transaction. Forex cannot work without market makers, because demand can be higher than supply.
Moreover, market makers can influence the market, by selling and buying huge amounts of assets. Such activity can cause excitement on the part of other participants and affect quotes.
Features of Liquidity Providers
Interestingly, market makers and traders do not directly enter into a trade. They need a middleman for this. And this is where the liquidity provider comes in. This is a special intermediary that communicates between orders of traders and market makers. Each broker, creating a platform, tries to execute user transactions as quickly as possible. And this is possible if the client trades popular currency pairs. But in the case of other options (or insufficient depth of the order book), a situation with price slippage may arise. This delay leads to losses for the trader. And clients can go to another broker.
LP provides high-quality communication between banks and major funds and traders’ orders. Thanks to this, the broker can significantly increase the depth of the order book, as well as gain access to zero spreads. This means that the client will be able to sell or buy an asset quickly and at the most favorable price.
The main difference between LP and MM is the different roles in the order fulfillment phase. The liquidity provider acts as an intermediary between the market maker and the broker. And MM has a large pool of liquidity and is responsible for accessing cash, guaranteeing fast execution of the transaction (which also keeps the market active).
Basic LP Types
There is another important factor to keep in mind when creating a brokerage business. There are several types of liquidity providers. For example, Forex prime brokers partner with Tier1 LP. These intermediaries work with the largest and most influential banks or funds (Barclays, Saxo Group, AIG, JP Morgan). These MMs are capable of financing any deal.
Newcomers to the market cooperate with LP Tier2 STP (Straight Through Processing). Often, such an intermediary also acts as an MM. A liquidity provider helps companies do business with a bank or large exchange. Traders’ orders are executed thanks to local financial institutions and small funds.
What to Choose?
You need to choose a quality liquidity provider that can guarantee fast and high-quality order execution. In this case, your best bet is Tier1 LP. Because Tier2 LPs don’t have that deep order book. This means that there may be a delay in order execution. Also, with direct access to the ECN network, each user must have at least $10,000 in deposit. This is not a very convenient condition for many traders.
And if you decide to start an exchange with maximum efficiency, then it is best to cooperate with Tier1 LP. Quality and reliable broker is ready to offer its clients maximum opportunities, including high-quality software. With such a companion you will be able to create the best exchange.
