Market makers are participants in the foreign exchange, stock, financial derivatives, bond, and commodity markets; they facilitate the execution of trades. Without market makers, there would be no significant market activity. Because they are responsible for providing market “liquidity,” they are also known as “liquidity providers” (LPs, hereinafter referred to as “LP”).As a broker, finding the right liquidity providers is crucial.
Finding a good LP depends on many factors. Depending on market conditions, liquidity providers are crucial for issuing two-way quotes to counterparties, who are free to bid up or drive down the price.The true measure of a good LP is whether they maintain their role as a market maker when you request a quote during challenging market conditions. When the market becomes chaotic, LPs are most likely to appear “busy” or “unavailable.” During periods of extreme volatility, a good market maker remains capable of quoting prices in both directions.
Excellent Liquidity System
For brokers, a good liquidity system allows you to check rates before and after trades, and its high level of transparency ensures you receive accurate data. A good liquidity system can connect brokers with more than a dozen globally renowned market makers.The system does not rely on a single LP; instead, it aggregates and matches all data to select the best bid and ask prices, providing the broker with the lowest spreads. The system acts as a “mediator,” offering the broker the best matching prices based on the size of the user’s order and preventing the broker from being exploited during the pricing process.
However, the quality of an LP is not determined solely by its spreads. Many brokers also consider the “fixed price” commitments offered by LPs. Depending on market volatility, clients expect a fixed spread for each price.
During market volatility, unprofessional LPs will widen spreads to mitigate their own risk, which may also result in losses on future positions. In contrast, reputable LPs will continue to maintain a consistent spread policy. At the same time, they will maintain substantial inventory to provide pricing to the majority of brokers in the market.The services offered by a brokerage firm with only a few dozen instruments differ from those of a firm with several hundred. Brokers can select an LP that suits their needs based on their operational capabilities and the range of products they offer.
Integrated Systems
Next, ensure your LP integrates seamlessly with the latest software. Even during market volatility, you’ll be able to maintain effective communication between the market and your clients. Since clients are constantly monitoring the market and executing trades, they will not tolerate any errors or delays.
Of course, when the market fluctuates, prices fluctuate as well. At such times, clients with large orders will be executed first. The remaining single-lot or small-position trades will likely be filled at secondary prices—this is a standard trading rule. Executing orders as close as possible to the market’s bid/ask prices is referred to as “good execution.”A reliable back-end system will help you achieve “good execution” based on market conditions.
A strong LP enables brokers to execute orders quickly, avoid delays and cancellations, and improve operational efficiency. Similarly, brokers must have a comprehensive understanding of the LP, including the transparency of counterparties in their reporting. To protect your own interests, be sure to choose a provider with a valid regulatory license and select all applicable regulatory options during the trading process.
Ideally, a liquidity system should be integrated with a risk management system, allowing you to manage a large volume of simultaneous trades while ensuring accuracy, stability, and minimized risk. Therefore, integrating systems across all platforms is crucial. A highly comprehensive solution will help brokers maintain control over the entire operation.
Further Reading:
Building a Forex Platform: How Do Forex Brokers Choose Liquidity Providers?
What role does a liquidity clearing system play in the foreign exchange brokerage business?
