What to Consider When Choosing a Liquidity Provider

Source: Fazzaco 2020-08-13

Liquidity Providers are an absolute necessity for every brokerage; but what are they and how does one go about choosing them? In this article, we will try to point you in the right direction and give you a few tips- the rest is on you!

Authenticity

Just as retail brokers must be regulated, LPs must be regulated as well. Regulation is an excellent way to weed out potential liquidity providers.Regulators usually require LPs to operate segregated accounts. Regulators also stipulate mandatory capital requirements as well as policies and procedures guiding the operations of the LP.

Server location

The location of the liquidity provider servers is a major element brokers have to consider, which concerns order transmission latency and price slippage when making real-time market orders.

If you are located in New York, then choose a liquidity provider whose server is located in New York. Otherwise, the time taken for the liquidity provider’s order confirmation will take slightly long (usual difference between 100-200 milliseconds). Same goes when customers transmit out orders to the liquidity provider.

Multi-asset liquidity

In the modern world of today, multi-asset liquidity and a deep order book is an absolute must. Not all LPs can provide a full scope of instruments, but the more – the better.

There is a wide variety and it depends what you want to offer your clients. Instruments vary from FX pairs, shares, indices, commodities and even ETFs.

Execution Quality

A liquidity provider must be able to offer fast trade executions with re-quotes or slippage, particularly during times of high impact market news.

For example, some liquidity providers provide a very small spread, however, on actual execution, you will be filled on prices with a considerable amount of price slippage even on a small trading size, or else, pend or reject trades on market orders.

Spread and Commissions

Cost is a key ingredient of brokerage operations. A liquidity provider’s price offering must include spreads which are competitive as well as low commissions and swaps with no compromise either side.

Data Feeds

A liquidity provider should be able to offer client data feeds which are stable and reliable. Price feeds must reflect real-time prices from all relevant exchanges as well as the interbank forex market. Retail clients and the brokers should have the possibility to compare those prices in a convenient way. Any delays in price data delivery may result in gaps.

Access to historical market data and the tick data is an essential part of the solution as well as complete order book presented via FIX protocol or trading terminal offered by the LP.

Technology Support

Technology can offer a competitive advantage.

Your provider needs to offer you superior trading platforms, easy onboarding and integration methods, full reporting system, along with assistance with set-ups.

The choice of an LP, just like any part of your startup broker business, isn’t one to rush through. he process of choosing a Liquidity Provider requires a thorough analysis

(source:liquidity-provider,spotware, grentone, ausprime, b2broker, xopenhub)

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What to Consider When Choosing a Liquidity Provider

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