Reasons to Replace LP for Non-Dealing Forex Brokers

Liquidity is one of the main characteristics of a brokerage firm. New traders prefer to join the brokers as their orders are about to be implemented immediately. High price differentials, gaps, and price slippages force traders to open accounts on other platforms.

What is the role of a liquidity provider?

The market for Forex is known for its massive daily sales - transactions worth over $7 trillion are made within 24 hours; Meanwhile, brokerage firms need help from big banks, hedge funds, and other giant players in the industry. Another problem arises - the main players only deal with huge sizes.

Therefore, intermediaries need to apply to liquidity providers (LPs). Such companies create liquidity pools that unite the largest companies involved in the trading of Forex. The brokerage company's order book is linked to those liquidity pools, and orders from the dealers are immediately executed by the market makers. Brokers themselves get commissions from each transaction, and this model makes companies expect traders to open as many orders as possible.

Liquidity providers and market makers: what's the difference?

New entrepreneurs often connect with market makers from LPs, while these roles are quite different in financial markets.

Market makers are responsible for maintaining a certain market activity through giant trading volumes. For example, the international banks, the top-rated hedge funds, the investment funds, and the other players that buy and sell banknotes are the market makers in the Phoenix industry.

Liquidity providers are third parties, acting as agents between brokerage firms and market makers.

Meanwhile, intermediaries may choose the market maker's model, but not the liquidity suppliers. The form indicates that the media order book consists of internal submissions only and that the matching engine has factors that look for correspondence between submissions. Do brokerage firms meet traders' expectations? Experts put on the argument that the order book is broad enough when the total number of registered traders is over 1 million. Moreover, many professional traders use fewer common pairs - for example, the pound/franc pair is 20 pairs in terms of the number of traders at 0.73% of the total volume. When the brokerage firm doesn't link any liquidity pools, dealers face huge gaps in pairs' circulation among the top ten.

As such, the first-book intermediaries (companies that link order books to liquidity pools) provide better conditions for traders.

LP companies are of two types:

Tier 1 liquidity providers connect brokerage companies with the ECN network – the electronic system of bid and ask orders execution. ECN unites the largest market-makers (JP Morgan Chase, Barclays, Deutsche Bank, etc.).

Tier 2 providers are also known as Forex prime brokers. A company opens an account in one or several banks and provides brokerage companies with access to such liquidity pools.

Furthermore, there is one more type of LPs – Prime-of-Prime providers that set up their own liquidity pools and connect those pools to as many market players as possible (OTC brokers, dark pools, Tier 1 banks, Prime brokers)

Features of a reliable liquidity provider

We will review the features that liquidity providers must have, and any deficiencies in any of these features make it easy for the brokerage firm to make it easy to replace the liquidity provider immediately to maintain the quality of service provided to its customers.

• Diversified instruments

Nowadays it is essential for a broker liquidity provider to have multi-asset liquidity and a deep order book. The list of market tools should include FX (Forex), bonds, equities (stocks, DMA, synthetic stocks), equities CFDs with leverage commodities (agriculture, emission rights, energy, industrial metals), cash indices as well as futures indices, bullions (precious metals including gold, silver, platinum, palladium), and ETFs. A liquidity provider should present to you a complete order book via trading platform and via FIX protocol, where you can have access to historical tick data of each level of the order book.

• Regulation, compliance, and trust

A liquidity provider should have a regulatory status and disclose under which regulatory it is regulated. Unregulated liquidity FX providers are dangerous for those who deposit funds.

Also, the trustworthiness of the regulating entity should be verified. It's advised to choose a public listed company as the liquidity FX provider. As a broker, you should be able to check all the reports, financial stability, and conditions of the potential partner

• Speed and reliability of trade execution

A good liquidity provider should offer time as a priority execution and full post-trade transparency. The execution system should be detailed especially during the market data releases and unexpected events such as SNB. You should be able to easily check the trade execution using an automated trading software or app that can allow you to build detailed statistics.

• Liquidity pricing

Make sure your liquidity provider offers competitive spreads and commissions, and overnight fees. Check that futures-based instruments like commodities and indices are not charged with swaps.

• Transparent conditions

Liquidity providers make money in different ways. Reliable companies set up fixed commissions charged based on executed orders. Meanwhile, LPs may impose other fees on brokerage companies (e.g., fixed monthly fees).

While discussing your cooperation conditions, look through the commissions and other payments. Reliable LPs offer transparent conditions.

• ​Information feed

A broker liquidity provider Forex must provide stable and reliable feeds without any spikes or gaps on the charts. This information must act like a mirror representing accurately the prices from the different interbank foreign exchange markets. They cannot deviate an inch from what are the valuations in the different stock exchanges. You should have the possibility to compare those prices in a suitable way. Access to historical market data and the raw data is an essential part of the service together with a complete order book presented via FIX protocol or trading terminal offered by the broker liquidity provider Forex.

Solutions you should expect from a liquidity provider FX

· API

· FIX protocol connection

· MT4 bridge and MT5 bridge connection

· MT4 Gateways

· Connections via serious MT4 and MT5 bridge providers

· Market data

Any liquidity provider FX who quotes from instruments based on the offer of certain exchanges must sign a market data redistribution license agreement.

Some of the best liquidity providers have full packages of market data ready to be implemented by their partners.

In the end, we conclude that companies that operate on a system based on liquidity providers have as their first goal to obtain the best service without any hindrance affecting their performance, and the extent of their credibility in front of their customers, so most of the companies deal with more than one liquidity provider at the same time to get the best offer to their customers.