Smart Way to Choose a Liquidity Provider

Choosing a liquidity provider may seem like a daunting task for up-and-coming forex brokerages. At Doo Clearing, we make the process smooth and hassle-free for brokerages, fund managers and other institutional traders.

What is forex liquidity?

Liquidity in forex refers to the ability of a currency pair to be traded on demand without causing significant fluctuations in its exchange rate. Liquidity makes the forex market efficient. Liquidity also enables transactions to be executed much more easily, with lower transaction costs and more competitive pricing for currency pairs. Forex trading would be too expensive and unfeasible without liquidity.

What is a forex liquidity provider?

There are three types of liquidity providers, Tier 1, Tier 2 and ECN/STP Direct Market Access liquidity providers.

Tier 1 liquidity providers are massive, transnational banks such as BOC, CCB, HSBC, Deutsche Bank, etc. These banks provide price quotes for all currency pairs that are traded across the market over an electronic communications network (ECN). These banks determine the prices of liquidity, establishing the market for forex brokers and traders.

Tier 2 liquidity providers are the middle ground between brokerages and Tier 1 liquidity providers. These liquidity providers function as intermediaries between forex brokerages, enhancing the liquidity in the market to ensure that there is always a buyer or seller to execute trade orders.

ECN/STP Direct Market Access (DMA) liquidity providers are a crucial link between sources of Tier 1/Tier 2 liquidity and retail forex brokerages. ECN/STP liquidity providers facilitate a secure and efficient trading environment with reliable infrastructure for retail brokers and other institutional traders to access premium liquidity. These liquidity providers also provide their clients the lowest possible spreads based on current price quotations from Tier 1/Tier 2 liquidity providers. Brokerage solution providers and financial institutions such as Doo Clearing is an excellent example of an ECN/STP DMA liquidity provider.

How do I choose my liquidity provider?

After gaining a thorough understanding of forex liquidity and liquidity providers, let us examine some industry best practices for choosing a liquidity provider. As an up-and-coming forex brokerage, you will want to choose a liquidity provider that will meet your requirements in a timely, consistent and professional manner. The first step is to thoroughly examine and understand the situation, setup and requirements of your forex brokerage. The size of your brokerage, your target market and your business model are crucial points that are vital in guiding your criteria as you search for a suitable liquidity provider. With that in mind, here is a checklist of 7 things to be on the lookout for in a forex liquidity provider.

• The Offer: An adequate offer consists of a complete order book, trading platform and FIX protocol implementation showing trade history. A good liquidity provider will offer a wide range of products and instruments with options for multi-asset selections such as forex, commodities, index futures, spot metals, energies and contracts for difference.

• Pricing: Competitive spreads and commissions tied with low overnight fees, ie. high quality, low prices.

• Data and Price Feeds: A good forex liquidity provider must provide stable and reliable data and price feeds. Ideally, the forex liquidity provider should have the latest, most robust software and low-latency network infrastructure that reflects real-time prices from the inter-bank forex markets without any delay.

• Reporting: It is important to check if your liquidity provider offers the full reporting checklist including email reporting, trade reporting, profitability reporting, full reconciliation reporting, FIX bridge reporting, order book access, tick data, etc. to name just a few.

• Slippage: In the forex market, slippage usually happens when volatility is high as a result of news events, or when the currency pair is being traded beyond peak market hours. A suitable forex liquidity provider should be able to provide statistics on positive and negative slippage, which will have a significant positive impact on your brokerage.

• Complete Repertory of Integrated Fintech Infrastructure and Software: This deserves its own category to stress the importance of first-class forex trading software, platforms and interfaces. A forex liquidity provider worth its weight in gold will at minimum offer the following:

  • FIX protocol and other API implementations

  • MT4/MT5 bridge connections

  • MT4/MT5 Gateways

  • Reputable, trustworthy MT4/MT5 bridge providers

These criteria may make the search for a forex liquidity provider that possesses strong technology, experience, choices and credibility appear to be a daunting task. However, you have crossed the bridge halfway. Doo Clearing has got you covered with its robust liquidity range, vast fintech resources and extensive practical market experience. Browse our solutions, contact our specialists to understand our offerings and request a demo today.

London office

Tel: +44 2071128722

Email: [email protected]

Web: www.dooclearing.co.uk

Hong Kong office

Tel: +852 95612013

Email: [email protected]

Web: www.dooclearing.com