The evolving demand for currency trading has led to challenges in offering financial services. New brokerages find it simpler to launch their businesses with the help of digital trading platforms. Novice brokers must rival established firms in the market and secure sufficient funds at competitive prices.
Connecting with various sources of funding and liquidity is essential for brokers and LPs play a key role in facilitating this connection. This enables brokers to leverage the benefits of liquidity suppliers when entering the FX brokerage market.
How LPs Work?
LPs are financial institutions that provide products and securities for trading markets and can act as market participants, taking the counterparty side of investors’ orders. They offer liquidity, asset classes, trading channels, investment options, and other trade execution channels.
Liquidity sources vary by market. For example, in FX trading, liquidity is sourced from tier-1 firms, investment corporations, central banks, and currency marketplaces. FX trading providers allocate liquidity using technologies like aggregation software and prime-of-prime brokers.
EUR/USD is the most liquid asset in the FX market due to its widespread use in international trade and the presence of numerous investment banks and trading companies.
However, trading TRY/JPY has fewer intermediates, creating a significant difference between bidding and asking prices. This results in parties proceeding with the trade, with the LP earning from the spread and commission rates in exchange for their services.
Different Types of LPs
Trading intermediaries’ bandwidth is expanding, with liquidity providers facilitating trades using techniques like rerouting and order book consolidation, presenting four main types of liquidity providers.
Banking Institutions
Central, commercial, and investment banks are prominent traders in trade markets, using their capital and cash flow to invest in currencies and facilitate FX trades. They also offer currency trading to investors.
Market Makers
Market makers are third-party entities that reduce the gap between buyers and sellers in trade orders, particularly for securities with low liquidity or unstable bid/ask price ranges. They buy and sell market instruments at affordable prices, making assets more available and the market more liquid.
Electronic Communication Networks
ECNs significantly enhance trading tools and techniques by consolidating liquidity from multiple sources and order books, making new brokers competitive with established leaders. ECNs also provide brokers with more control over funding channels, enabling them to analyse liquidity flow.
Prime Brokers
Finance enterprises, investment corporations, and hedge funds manage large accounts and serve multi-asset investors, making them influential in the FX trading market, facilitating order execution and making tradeable instruments available.
Bottom Line
Liquidity is crucial for market performance and trade facilitation, boosting faster order execution and overall market well-being. Choosing a reliable LP like market makers, ECNs, banks, or prime-of-prime companies can enhance your service offerings and attract more users to your FX brokerage firm.
