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!
Any broker will agree that Market Makers are necessary for trading in the various markets (such as bonds, stocks, commodities and more) possible in the first place. These people create a considerable amount of activity in the markets, which gives them a momentum that enables other, smaller, traders’ movements on which they can trade – which is why they are also called Liquidity Providers.
If you are a broker, at one point in time you will have to choose a Market Maker, however this is no easy task as there are many variables that need to be considered in the process. Since a large part of an LP’s job is making counter-directional bids (which can be agreed to or negotiated), one way in which someone can be judged as a good Liquidity Provider is whether they continue to place bids even if the situation in the markets becomes rough.
But how does a new broker go about finding a Liquidity Provider? According to Leverate’s VP of Sales, Mr. Maoz Tenenbaum, the easiest and best way for a beginner is to consider this when choosing their Tech Provider: “…a solid and reputable Tech Provider has not only the proper connections, but also a vested interest in their associates’ success; which is why they will be happy to help new brokerages find LPs. It’s mutually beneficial!”
On the note of Tech Providers, it is important to mention that a Tech Provider’s importance in liquidity issues is far more than helping new brokerages find LP’s. They also provide Liquidity Systems, such as Leverate’s LXCapital, which present the broker with pre- and post-trade rates, allowing for better transparency and decision making.
Important though it is, the quality of their bids (a.k.a “spreads”) is not the sole parameter on which an LP is judged. A few other elements that come into the mix are their adherence to the tight spreads that they offer, even when there is uncertainty in the market- a time in which those with a lower level of professionalism often widen their spreads. Needless to say, a good partner is not one who bails when the going gets tough.
Another important thing to consider in an LP is the extent of their knowledge, information, and trading. For example: an LP with a narrow bid portfolio, is less likely to provide the same results as their colleagues with bids on a wider array of assets. Therefore, another important word to remember when choosing an LP is “variety”.
We hope that it goes without saying that you want to choose an LP that uses the latest software. In an industry driven and maintained by technology, second best is not a sustainable compromise, especially when being the first to spot an opportunity and act upon it is what separates success and failure.
The above is referred to in the industry as good execution, that nowadays almost entirely dependent on technology. Long gone are the days in which someone “calls their broker”- we live and trade in an era of milliseconds, and the only way to ensure that an LP can be the first to act on an opportunity is to make sure that they have the technological tools to do so.
The last thing that you need to look at when deciding on an LP for a future partnership is your general impression of their conduct. Are they transparent in their reporting? Are they diligent in regulatory compliance and record keeping? Are they offering something that sounds too good to be true? Do they speak to the point or is their talk full of sales pitches and superlatives? There is no way to teach intuition, but if you maintain a cautious and alert approach in your partnerships, these points will help you choose the right LP.
This is one more place in which a reference from your tech provider can go a long way towards choosing a good LP. The tech provider, having a vested interest in your success, is likely to connect you with a good LP because they want to profit from your activity as well.
Many Tech Providers offer packages, and these are, for the most part, a good product. Not only do they cover many of a new brokerage’s bases (such as Leverate’s LXCapital, which is synchronized with another software of theirs- LXRisk), but they also deepen the partnership without the need to relinquish on the brokerage’s part- resulting in increased profits for all parties involved.