Liquidity is an essential ingredient in the world of financial trading. The forex market thrives on liquidity. Liquidity is what makes the market architecture efficient. It is what ensures that there is a ready buyer or seller for a trade order. It is what ensures an easier transaction flow, cheaper costs of transactions as well as more competitive pricing of currency pairs. Without liquidity, trading forex will be too expensive and simply impracticable for many of today’s traders.

Today, daily turnover in forex is slightly above $5 trillion according to the latest of the triennial studies done by the Bank of International Settlements (BIS). This makes the forex market the most liquid market of all financial markets in the world. Much of this liquidity is as a result of the pricing and activities provided the largest global banks in the world. These are the liquidity providers. They buy and sell forex to smaller banks, brokers and corporations. The smaller brokers are then able to chop up these positions and offer them to the retail participants in the market.

Liquidity providers (LP) need to have clients to stay in business. The clients also need the liquidity providers to remain in business. It is a symbiotic relationship. However, it is important for brokers to understand what their own in-house needs are and how they can select the best liquidity provider to fill these needs.

So what are the issues that confront brokers when it comes to selection of liquidity providers?


Selecting the Best Liquidity Provider: Matters Arising

Generally speaking, the process of choosing a Liquidity Provider requires a thorough analysis of the following factors:

  • Pricing
  • economic efficiency,
  • effectiveness of the trading infrastructure,
  • surveillance of the IT systems,
  • legal aspects

Different categories of brokers shop for liquidity providers for various reasons. A broker will usually consider its size, its target market and business model in shopping for a liquidity provider.

  • Smaller brokerages with a shoe string budget usually do not have large transaction sizes. They will therefore need to consider looking for liquidity providers that can accommodate their small turnovers without excessive compromises on price feed stability. This can severely limit the choice of providers for such a brokerage. These startup brokerage also have limited bargaining power with the liquidity providers.
  • Brokers that can be classified as being in the growth phase of their project would already have has some of their infrastructure in place, with a sizeable number of clients. They can offer more trade volumes than the startup brokerages. Therefore, they can go for something higher; support for various order types, more market depth and access to the FIX protocol. These brokerages can typically negotiate for lower commissions and spreads because they can offer higher volumes.
  • Large brokers who have lots of clients and are on much stronger financial footing can deal with any Tier 1 provider they want.


Choosing a Liquidity Provider: What to Consider

The following is a guideline on what the brokerage should consider in order to pre-qualify a liquidity provider, after which a choice can be made from LP companies that have made it to your pre-qualification list.

What is on Offer?

What does the liquidity provider offer? What are the assets and what kind of liquidity is provided? Will the LP provide liquidity across several assets as well as access to a deep order book? Nowadays, traders demand more from their brokerage platforms in terms of being able to trade multiple assets across several asset classes. Therefore, multi-asset liquidity to trade FX, commodities, index futures, spot metals and equities must be provided by the LP. The LP should also be able to provide the brokerage access to the FIX protocol and historical data.

Trade Executions

The hallmark of a LP in terms of trade execution is being able to offer fast executions with requotes or slippage, especially during releases of high impact market news.


Cost is a key ingredient of brokerage operations. A LP’s price offering must include spreads which are competitive as well as low commissions and swaps. There must be a balance between saving money in terms of getting cheaper costs and quality of the service provided.

Data Feeds

A Liquidity Provider should be able to offer the brokerage client data feeds which are stable and reliable. Price feeds must be reflective of real-time prices from all relevant exchanges as well as the interbank forex market. Usually, the LP should be able to deploy proprietary software that deliver raw pricing to brokers, which results in no added costs. There should be no delays in price data delivery which could result in gaps. It should be possible for the brokerage’s clients to compare prices from several sources to confirm authenticity.

Authenticity of the LP

Just as retail brokers must be regulated, LPs must be regulated as well. Regulators usually require LPs to operate segregated accounts. Regulators also stipulate mandatory capital requirements as well as policies and procedures guiding the operations of the LP. These are what ensure that the LP is operating under the industry’s best practices. It should be possible to independently verify a liquidity provider’s licensing status. Publicly quoted LPs are subjected to greater scrutiny from the regulators and the public. Furthermore, ensure that there is a prime broker backing up the LP.

Reporting Requirements

The LP should be able to provide the broker with an automated and robust system of reporting to enable them comply with regulatory requirements. Some of the reports that may need to be generated include:

  • Trade reports (open and closed trades)
  • FIX bridge reporting
  • Swaps and rollover reporting
  • Tick data
  • Order book access


Brokers should be able to get the following software implemented for them by an LP:

  • FIX protocol and other APIs
  • MT4/MT5 bridge connections
  • FIX bridges