As more individuals engage in currency trading, the provision of financial services becomes increasingly difficult. Online trading platforms have facilitated the entry of new brokerage firms into the market, although they must contend with larger competitors.

Securing adequate funds at competitive prices and interest rates presents a significant challenge, especially when contending with other large firms for appealing investment opportunities. The presence of liquidity providers (LPs)  is crucial as they enable brokers to access different funding options. Find out the best ways to utilise fund suppliers when establishing a new FX brokerage platform.

Forex Liquidity Providers And Their Role In The Market

How LPs Work

LPs are financial institutions that provide trading markets with products and tradeable securities, acting as market participants and taking the counterparty side of investors’ orders. They offer streams of tradeable securities, asset classes, trading channels, investment options, order books, and other channels that facilitate trades.

Liquidity in the market varies depending on the associated finance market, such as FX trading, where LPs source funds from tier-1 trading firms, investment corporations, central banks, and currency marketplaces. FX trading providers use technologies to compile, consolidate, and allocate funds between partners and brokers through 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 global economy. However, trading TRY/JPY has a relatively low number of intermediates, creating a significant difference between the bidding and asking prices. 

LPs come to buy at a better price for the seller and sell it to the buyer at a better price for the bidder, increasing the likelihood of parties proceeding with the trade and earning from the spread and commission rates in exchange for their services to the broker.

Various Types Of LPs

The trading intermediaries are expanding, with more bank and non-bank LPs playing a crucial role in facilitating trades. FX brokerage firms face four main types of liquidity partners: market makers, banking institutions, and prime brokers. 

Market Makers

Market makers decrease the gap between buyers and sellers, buying and selling financial instruments at more affordable prices to make assets more available and the market more liquid.

MMs in financial markets maintain market functionality by infusing liquidity and ensuring smooth trade execution. Without them, investors cannot unwind their positions due to limited buyers. Market makers act as wholesalers, purchasing securities from bondholders and ensuring stock shares are available for purchase. 

Prices set by market makers reflect demand and supply. Stockbrokers can also perform market-maker functions, but this may create a conflict of interest as they may be incentivised to recommend securities that make the market to their clients.

Banking institutions invest in various currencies and facilitate trades in the FX market, offering currency trading prospects to investors. 

Prime Brokerage Agencies

Prime brokers manage large accounts and serve multi-asset investors, making them highly influential in the Forex trading market. Prime Brokers offer clients efficient trade execution at competitive prices by aggregating prices from multiple LPs. They also provide credit intermediary services, allowing clients to trade on margin and leverage positions without establishing individual credit relationships. 

They offer real-time position monitoring and margin call management services for effective trading exposure management. Prime Brokers also provide sophisticated reporting tools, trade reconciliation services, and back-office support for institutional clients.

ECNs play a major role in developing trading tools and techniques, helping brokers offer the best trading conditions by consolidating liquidity from multiple sources and order books. ECNs are more convenient to use and adjust according to market conditions, giving brokers more control over their funding channels and allowing them to switch between liquidity providers and analyse money flow to identify patterns or anomalies. 

ECNs have revolutionised financial markets by allowing traders to buy and sell finance instruments like currencies, commodities, stocks, and bonds. They also provide large institutions, such as banks, with the necessary price stability to execute trades efficiently and at the best possible prices, making them a crucial component of the interbank market.

Final Thoughts

Liquidity is crucial for market performance optimisation and trade facilitation. To launch an FX brokerage firm, choose from various liquidity providers like market makers, ECNs, banks, or prime-of-prime companies. These companies can connect your platform with consolidated order books and funding sources, offering optimal trading conditions and prices, ultimately improving service offerings and attracting more users.