If you have clicked on this link, I assume that you are either an individual forex trader, brokerage or enabler in the forex market seeking to understand what to look for in a forex liquidity provider. Rest easy and read up, you are at the right place!
Now, before getting down to brass tacks, let’s relook at a couple of things most of us already know.
What is forex (FX) liquidity?
The ability of a currency pair to be bought and sold (traded) on demand without causing a significant change in its exchange rate is the definition of forex (FX) Liquidity. The forex market thrives on liquidity, as it makes the market extremely efficient. Forex liquidity ensures an easier transaction flow, cheaper costs of transactions as well as more competitive pricing of currency pairs. Without liquidity, FX trading will be too expensive and won’t make sense for many of today’s traders.
Who is a forex liquidity provider?
Strictly speaking, there are two types of liquidity providers: Tier 1 and Tier2.
The Tier 1 liquidity providers are the large global banks like HSBC, Citibank, Deutsche, etc. who provide price quotes for all the currency pairs that use ECN (Electronic Communication Network) in the market. Basically, these giant banks set the benchmark for the liquidity making the market for forex brokers and traders.
The Tier 2 liquidity providers, on the other hand, are known as market makers in the forex space. A market maker is basically any company that is ready to sell or buy an asset at a publicly quoted price on a regular and consistent basis. In the forex market, this asset is essentially the currency pairs among other instruments.
These Tier 2 liquidity providers act as intermediaries between the end clients (traders) and the big banks. They enhance the liquidity in the market making sure that there is always a buyer or seller to fulfill trade orders. Small and medium financial institutions, brokerage solution providers or prime brokers like Sanfrix, are some good examples of Tier 2 liquidity providers.
Basically, the Tier 2 liquidity providers get liquidity from the Tier 1 providers and offer this pricing with a small mark-up to the end retail clients.
Finally, the ‘brass tacks’!
Now that we have understood or re-established where we come from, let’s look at where we want to go. We need to choose a liquidity provider that will deliver to our requirements in a timely and consistent fashion with no holes in the system. The first step here is to ensure you have a good understanding of exactly what your in-house requirements are. Your brokerage size, target market, and business model make the framework before you even set out looking for liquidity providers in the forex market.
Here’s a checklist of 7 things to look for in a forex liquidity provider –
FX Liquidity Provider Feature #1: The Offer
A good offer will consist of a complete order book via trading platform and via FIX protocol showing the history of trade. A Liquidity Provider offering a range of products/instruments with multi-asset options like FX, commodities, index futures, spot metals, energies, and equities is usually an indicator of a good offer.
FX Liquidity Provider Feature #2: Execution
Trade Execution being extremely fast (at least below 100 ms), without rejects or requotes, with a high time-priority execution and full post-trade transparency, are important features of a Forex Liquidity Provider that should hold good weightage in your decision.
FX Liquidity Provider Feature #3: Pricing
Competitive spreads and commissions, but also low overnight fees; Best quality possible at the cheapest price possible.
FX Liquidity Provider Feature #4: Data and Price Feeds
Stable and reliable feeds (both data and price feeds) are a must-have for a good forex liquidity provider. An ideal forex liquidity provider will have the latest most robust software that reflects real-time prices from the inter-bank foreign exchange markets. No delay whatsoever!
FX Liquidity Provider Feature #5: Slippage
Slippage in the forex market usually occurs when volatility is high, based on news events or during times when the currency pair is trading outside peak market hours. A forex liquidity provider who can provide statistics on negative and positive slippage will add high value to your FX trading, regardless of the size of your business.
FX Liquidity Provider Feature #6: Reporting
Be sure to check if your liquidity provider offers full reporting packages including email reporting, full reconciliation reporting, profitability reporting, trade reporting (open and closed trades), FIX bridge reporting, tick data, order book access, etc., Anyone who understands the forex market will know the importance of these reports and include them in their offering.
FX Liquidity Provider Feature #7: Full Range of Software Solutions
The reason for this to be mentioned again outside of ‘Execution’ and ‘Offer’ is to stress the importance of a robust forex trading software/platform/interface. The ideal FX liquidity provider will have at least the following:
FIX protocol connection & other API
MT4/ MT5 bridge connection
Connections via reputable MT4 and MT5 bridge providers
Once you have filtered your options using the above-mentioned criterion, you will realize that finding someone with the technology, choices, experience, and credibility is not as easy as most of us might have initially thought. But the good news is you are halfway there!
Browse our multiple options, read up the product guides to understand what we offer and request a demo today!
If you want to know more about forex then read this