The term “liquidity providers” implies big scale financial organizations, which are usually prime-brokers and banks. They are like the foundation, the basis of the international stock exchange market. With no doubts, exclusively economically stable players have a chance to turn into real market makers, setting up the general trend to the entire trading sphere. This fact has to be perceived as a default circumstance, because only influential companies with a good, verified throughout the time reputation, can unite in chains, giving the data about quotes to brokers.
A trader’s activity supposes deep understanding of various specific terms, and, furthermore, detailed knowledge in Forex trading area is an obligatory condition for successful deals commitment. Only being an expert in this field, it becomes possible to reach significant achievements. Today we’re going to be talking about such subject as liquidity providers. A high percentage of traders, including newcomers and more experienced ones, often question us how to choose the best provider in order to increase their revenue.
Brokers, in their turn, use this information for direct interaction with retail customers, i.e. with traders. Here comes a necessity to search for the optimal liquidity provider due to their great influence on a trader, because to make up a certain preference in favor of some conctrete provider means to set up a standard of a one’s profit, depending on the currency prices. It’s absolutely obvious that the wrong choice of a liquidity provider may negatively affect you as a trader and may enrich just your “ideological rival” – a broker, of course.
How does price formation happen on the stock exchange market?
However, the reality is a bit different from the theory. It doesn’t seem to be possible to name only the one liquidity provider on Forex, let’s say, the monopolist, dictating their conditions regarding the quotes to all parties and not having any other contestants in this neverending racing. The difficulty of the choice lies in the reason that many market players also organize their own stocks, where an ordinary trader like you may take a look at these indicative quotes in the terminal. It’s quite natural that the real liquidity based on such quotes is barely predictable and nobody can give any guarantees here to you.
Let’s get into the topic of price formation, how exactly it goes and what they consist of. Thus, when the quotes are already in the terminal, they shape a so-called DOM (which stands for Depth of Market, or in other words, Level 2 in the USA), and the meaning of this term implies interdependence between the prices and the limited offers with volume. The most desirable for traders prices in DOM can be visible on a special graph, looking like 2 main levels, particularly Bid and Ask. As usual, deals by orders are those deals which are commited by the best prices from DOM. Consequently, each currency pair on Forex is the basis for creating all offers (concerning both Bid and Ask categories).
Speaking of the price formation process for a regular trader, it is crucial to point out the following important nuance. Due to too big volumes being traded by liquidity providers and because of their almost inaffordable amount for an ordinary person, who would like to become a trader, there are also some additional tools – liquidity aggregators, connecting providers with other financial organizations, including brokerage. You might get curious about this: why would we need any mediators? The answer is the fact that advisability of their usage is explained with the truth that only by doing so traders get an opportunity to commit deals in the affordable volumes. In this case we’re apparently moving to the next part of our today’s conversation about the principles of aggregators work.
Algorithms of liquidity aggregators work.
Firstly, let’s mention several of some well-known aggregators, which help to build business links between brokers and liquidity providers themselves. There are such aggregators as LMAX Exchange, CFH Clearing, Currenex и KCG Hotspot. But aside from these names (which must be familiar to many traders, we are sure about that), what’s more important here is their functional subdivision to 2 general types, which are:
ECN is Electronic Communication Network. The aim of its existence is to be a touchpoint for all offers coming from various market players. The data about all deals is being constantly added to the aggregator’s database, then the similar in terms of price and volume, but opposite in terms of their direction offers get looked up. In accordance with the condition that two similar by this criteria, but different by their move offers have been found, they get immediately accomplished and closed.
Nevertheless, such cases when the search doesn’t lead to any desirable results, also occur. If that happens, ECN sends a request to the liquidity providers directly. If the request gets satisfied, then the offer, and, therefore, the deal gets committed, but if the trade fails due to inability to reach a compromise, then the client receives another request from the aggregator, where ECN asks to consider some other price, which would be satisfactory for both the broker and the trader. However, negotiating here might be not less difficult, because due to the high price volatility, when it changes too quickly, it gets really hard to use the default price.
But aside from such a popular aggregator type as ECN, Forex trading doesn’t avoid the other famous instrument, and its name is MTF (Multilateral Trading Facility). Its mechanism can be called as user-friendly, moreover, it’s friendly to a few sides at once, because its working principles allows to mutually trade even those financial products, which might not have any official platform for themselves. Market players usually use MTF as an alternative method for committing stock exchange trades, and what is actually beneficial about it is its almost full lack of restrictions and prohibitions than on the other aggregators.
MTF has already conquered its popularity in Europe, thanks to a higher transaction speed and its expenses optimization related to the clients service. Earlier, before MTF appeared on the market, traders and brokers used to count on the data provided by such stock exchange markets as LSE and Euronext. But these days a new opportunity seems to be much better: just imagine that you can trade without constant thinking about them and act with more independence. There’s an interesting fact (by the way, attracing some traders) that being a trader, you’re even allowed to sell and buy precious metals via MTF.
Certainly, MTF’s popularity has become a huge phenomenon and it has already reached the markets beyond Europe. Besides, in the USA a similar system, reminding of this aggregator, has been launched. This local aggregator is called ATS and performs a role, in fact, of a brokerage company, which is legally regulated by U.S. Securities and Exchange Commission. So, after all the aforementioned information, how to understand which type of an aggregator would be the best for an ordinary trader and what the differences between their principles of work are?
What liquidity provers could be characterized as trustworthy?
Generally speaking, ECN and MTF differ one from another by a list of certain reasons, and these reasons are mainly these: in ECN orders get closed a bit slower, re quotes may occur (highly likely), and in MTF we observe a wider spread. Having understood this fundamental information about aggregators, we are getting to the final point of our today’s topic regarding the optimal choice of the liquidity providers. The importance of this aspect has been discussed in the very beginning of the article, and now let’s make a conclusion by listing the most well-known and reliable financial corporations in the top 5 of the best liquidity providers. Their number includes:
- Morgan Stanley,
- Credit Suisse,
- Barclays Bank,
- Deutsche Bank.
Which of these organizations you would like to choose as your liquidity provider, is only up to you, taking into consideration your personal financial needs, goals and abilities, and what should always be your priority is getting the maximal benefit in order to commit the deals by the best quotes.