What to Look for in a Liquidity Provider?

Market makers – you can’t live without ‘em. Those are the players in the forex, stocks, derivatives, bonds and commodities markets who make trading possible. Without market makers, there would be no significant market activity.

Due to the fact that they are responsible for making the markets “flow”, they are also known as “liquidity providers” (LPs). As a broker, sooner or later you will have to take that critical decision and get ready to meet your market maker.

Finding a good liquidity provider depends on a number of factors. Depending on their market outlook, market makers will make a two-way price, bid-offer to a counterparty, who is at liberty to lift or hit that price.

There are good LPs, and then there are the lesser LPs. The real measure of the people from whom you have requested a price is whether they will stand by their market making position when the going gets rough.

It’s the easiest thing in the world for an LP to be “busy” or “unavailable” when the market goes haywire. The ability to make a two-way price during periods of extreme volatility is the mark of a good market maker.

What makes a good liquidity system

A good option for starting brokers would be to pair up with a trusted technology provider that can bridge the gap and offer connection to reliable LPs through its systems. A good liquidity system will allow you to check available rates both before and after the trade, providing greater transparency and making sure your rates are fair. One notable such solution is LXCapital, by leading tech provider Leverate.

Natalia Vizir, Chief of Revenue, Leverate

“LXCapital connects brokers easily with over a dozen reputable global market makers”, says Natalia Vizir, Chief of Revenue at Leverate. “Many brokers fear being ripped off in the bid-offer price. LXCapital allows the broker not to be dependent on one LP alone. The system is configured to match the best ask and bid prices, to provide our brokers with the lowest spreads, starting at 0.2 pips for major pairs.”

“The advantage of having a company like Leverate as a mediator is our strong bargaining power with these liquidity providers. This allows us to provide competitive rates even for very high-volume orders,” she added.

But the quality of a liquidity provider is not judged solely by its low spreads. Other factors that should determine your choice of LP include their commitment to a “tight price”. Depending on the market, clients will expect a standard bid-offer spread (or “bid-ask” in US markets) on each price.

During times of market uncertainty, LPs who are less professional will widen that spread to protect them from taking on offside positions – that is positions that are likely to incur future losses. Good LPs will maintain a consistent policy of price spreads, even during turbulent market conditions.

Professional LPs will also be expected to have a deep inventory and provide prices on the majority of instruments in the market. Bond traders with only 25 bond names on their book are unlikely to provide the same service as a trader with ten times that number.

Choose an LP based on the range of products that they can offer, as that is a clear indication of the strength of their trading operation.

Next, make sure that your selected LP is wired up to the latest software. You don’t want the line to drop when the market moves. This will break the immediate line of communication with the market and with the trading desk that clients demand.

No glitches or delays can be acceptable as clients watch the market and place their bids and offers. Anything less than immediate response is inadequate. Of course, when the market moves, so do market prices, and it may be a sad fact, but those clients with big orders to fill are normally taken first.

Anyone trading single lots or small positions will likely be filled at uncompetitive prices, and that’s just the name of the game. Completing orders as close to the market or as close to a buy or sell stop as possible is called good execution, and solid IT systems will assist in achieving such fills, dependent on market conditions.

Here again, teaming up with a large technology provider can keep you at ease regarding speed of execution. “With LXCapital, our large pool of liquidity providers allows us to fill orders quickly, ensuring ultra-low latency execution and eliminating requotes”, says Mrs. Vizir. “In addition, our high-performance liquidity tools maintain stability, and avoid downtime or spikes almost entirely.”

Finally, when choosing your ideal LP, you must be aware of the big picture, and that includes an awareness of how transparent your counterparty is in terms of reporting. Always make sure that they have ticked all of the regulatory boxes during the execution of your trades, and that they protect your interests before their own.

“In Leverate we verify that the liquidity providers we are in contact with are trusted and compliant”, says Mrs. Vizir. “It is also important to note that LXCapital is synced with LXRisk – our robust risk management platform, to ensure accuracy and minimize exposure, while giving you control over huge amounts of simultaneous trades.”

“For all of these reasons, it is always advisable to opt for a complete liquidity package, one that offers you greater variety and gives you full control, while keeping you completely protected,” Mrs. Vizir noted.

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