How Liquidity Providers Make Money

Every day, a huge number of transactions are concluded in the Forex market. And the total turnover is more than $7 trillion per day. It’s no surprise that many users are thinking about starting a business on Forex. After all, a trader who has chosen a quality strategy and the right broker can weigh all the risks and conclude a profitable deal. But users don’t get direct access to the market. Here they are helped by a brokerage platform. Moreover, a fast order execution time is extremely important for a professional trader. This is where liquidity providers come to the rescue. Thanks to these intermediaries, the purchase and sale of the selected asset occur as quickly as possible and at a favorable market price.

Should the Brokerage Platform Cooperate with a Liquidity Provider?

In case a trader decides to start a business on Forex, he needs to choose a quality broker. There are two types of platforms when we talk about cooperation with liquidity aggregators.

  •         Platforms that are also market makers;
  •         Platforms that cooperate with liquidity providers.

In the first case, the broker is focused only on registered users. In this case, the depth of the order book may not be sufficient. Especially when we are talking about unpopular currency pairs. In this case, the offer among the broker’s clients may exceed the offer (or vice versa), which leads to an increased order execution time. Traders cannot quickly execute a deal, make payments, buy or sell a selected asset. The result is price slippage and high spreads.

Forex prime brokers usually work with reliable liquidity providers. An Intermediary (LP) provides a link between large pools of liquidity (market makers such as JP Morgan, AIG, Barclays) and traders’ orders. In this case, the depth of the order book increases significantly. This approach allows you to reduce the lead time and avoid price slippage.

What are the Earnings of the Liquidity Suppliers

Each company that decides to start a business on Forex strives to achieve maximum functionality. The platform strives to minimize costs and improve efficiency. In the case of cooperation with a liquidity provider, two main cost items should be noted.

1)  Spread and swap;

2)  Additional fees.

Let’s take a look at the spread. This is a special indicator that indicates the difference between the buy and sell prices for a selected asset. And the lower this figure, the better. The most reliable LPs are able to offer a spread that is close to zero. The less popular the selected asset, the larger this indicator.

For example, the Euro/Dollar currency pair is the most popular on the international currency market. Here, liquidity providers are able to offer a spread that is close to zero. There is no difference between buying and selling prices. In the case of less popular pairs (for example GPB/JPY), the spread can be much larger. From 0.015 and above (demand index – 151.504, and supply index – 151.519).

It should be said that the indicator of spreads is not fixed. It can change depending on the current market situation. Careful analysis reveals the trends you want. However, a reliable liquidity provider is able to smooth out these changes and their impact on the user.

Obviously, the liquidity provider should be paid for services. Typically, this is an additional commission that the broker (and his clients) pays to provide access to large pools of liquidity. The commission depends on the number of transactions and the specified amount.

Brokerage companies wishing to create a business on Forex should start working with a reliable liquidity provider. This is an important step in capturing the attention of potential clients and winning the tough competition from other brokers. A high-quality platform is able to provide traders with minimal spreads, a wide selection of trading pairs (at least several dozen), accept cryptocurrency payments, and provide a minimum order execution time (from 10 milliseconds). Also, additional advantages are the availability of licenses, support for other markets (CFDs, ETFs, metals), and the provision of leverage. The right choice will help you create an exchange with maximum efficiency and minimum cost. 

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