How Many Liquidity Providers Should a Broker Have?

In forex market, both brokers and liquidity providers are the important participants. To some extent, brokers and liquidity providers are both fighting the same competitive battle, just on different levels. There are even some brokers that act as liquidity providers themselves by offering their own bid and ask rates to their clients.

According to the data from allfxbrokers.com, the maximum number of liquidity providers that brokers connect to is over 30.

（data source: allfxbrokers.com)

But more connections really mean better execution?

Generally speaking, by connecting with multiple liquidity providers, the broker can offer their customers the best price obtainable from several liquidity providers, thus take a place in the fierce competition.

However, some experts point out the disadvantages of connecting a large number of liquidity providers. Noel Singh, Head of eFX Business Development at Sucden Financial mentioned in a interview, “One limitation of using a large number of liquidity providers is that it increases the potential for market impact. There is a general market preference for liquidity providers that have skin in the game and to internalise some of that risk.”

At the same time that brokers focused on consolidating their liquidity providers relationships, a number of FX banks have become more circumspect about their own counterparties, thus liquidity providers can be quite harsh in who they term as a good client.

Further, Ramy Soliman, Chief Strategy Officer of GMO-Z.com Trade UK
​once said “We believe that fewer relationships with liquidity providers produces quality liquidity. We can have a close relationship with each liquidity provider and understand exactly what they require. We believe this is the best approach. It is the same with clients. By focusing on a deeper relationship with liquidity providers, we can give them a better quality feed.”

In a word, the broker may use a single liquidity provider as long as the broker is able to deliver consistently best execution to its clients. If the broker is not able to consistently achieve best execution for its clients through one venue, then they should deploy multiple liquidity providers.

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