Due to increased competition from leaders, newly established brokers face challenges in offering trading instruments. One key challenge is executing trades and sourcing assets at reasonable prices and rates.
Liquidity providers are crucial in connecting brokers with multiple funding channels and sources, helping them overcome this challenge. Thus, By capitalising on these services, new FX brokerage platforms can enhance their offerings and compete effectively in the market.
How Do Liquidity Providers Work?
Financial institutions known as LPs provide tradeable securities to trading markets. They can also act as market participants by taking the counterparty side of investors’ orders, thereby facilitating the execution of trading positions. In this way, LPs help to supply the market with necessary products and services.
Liquidity is all about the availability of trading assets in the market. On the other hand, LPs provide a variety of tradeable securities, asset classes, trading channels, investment options, order books, and other channels that facilitate trades.
The provider of FX trading employs various technologies to gather, combine, and distribute liquidity among brokers and partners, using aggregation software and prime-of-prime brokers.
Four Main Financial Providers
Trading intermediaries are seeing an increase in bandwidth, with a growing number of bank and non-bank providers facilitating trades through rerouting, order book consolidation, and other methods to deliver optimal trading conditions and rates.
There are four main types of LPs that FX brokerage firms are likely to encounter.
Market Makers
Market makers streamline trade orders by acting as intermediaries between buyers and sellers. They are crucial for securities with low volumes or volatile bid/ask price ranges.
By buying and selling financial instruments at competitive prices, market makers help increase market accessibility for participants. Their role involves adjusting bid/ask prices in response to market fluctuations, hence their title of market makers.
Banking Institutions
Central, commercial, and investment banks are well-known trade markets and exchange players. They use their substantial capital and cash flow to invest in different currencies and enable trades in the Forex market.
In addition to trading for their own benefit, banks can provide currency trading to investors, capitalising on their influence and control over foreign currencies to offer investment opportunities.
Prime Brokers
Financial institutions, investment corporations, and hedge funds manage many accounts and serve multi-asset investors. As a result, they wield significant influence in the Forex trading market, ensuring efficient order execution and making tradeable instruments readily accessible.
Electronic Communication Networks
Electronic communication networks (ECNs) heavily influence the development of trading tools and techniques. These networks enable brokers to offer the most favourable trading conditions by consolidating liquidity from various sources and order books, thereby making new brokers competitive with established leaders.
In addition, ECNs are more user-friendly and adaptable to market conditions, providing brokers with greater control over their funding channels and the ability to switch between providers. This allows them to analyse liquidity flow, identify patterns or anomalies, and make informed decisions.
Concluding Remarks
Optimising market performance and enabling trades among participants are heavily influenced by how available assets are. Launching a successful FX brokerage firm to find a dependable LP is crucial.
There are various kinds of market makers, such as ECN, banks, or PoP liquidity companies. These market makers can link your platform with combined order books and funding sources, enabling you to provide trading with competitive terms and rates. Ultimately, these actions can enhance your service propositions and lure more users to your platform.
