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Choosing The Right Liquidity Provider

by | Dec 26, 2019 | Blog

In forex trading, liquidity is crucial. The deeper the liquidity, the smoother the transaction, and the more competitive you are against other brokers. Therefore, when it comes to STP or ECN trading, whether a broker’s offer is attractive enough and could provide a smooth trading environment largely depends on the liquidity provider to which the broker is connected. So, how should foreign exchange brokers choose liquidity providers? Let’s discuss.

1. Server location

For traders who trade electronically, servers are particularly important. The location of the liquidity provider servers is a major element brokers have to consider. This concerns order transmission latency and price slippage when making real-time market orders.

If you are located in New York, then choose a liquidity provider whose server is located in New York. Otherwise, the time taken for the liquidity provider’s order confirmation will take slightly long (usual difference between 100-200 milliseconds). Same goes when customers transmit out orders to the liquidity provider. Quants and high frequency traders will be most affected by this transmission latency; however, can be negligible to many retail traders, as the difference is in milliseconds. Therefore, if you are into professional high frequency trading and getting liquidity from a broker, ensure that servers of their liquidity provider are located in the same or similar location as those of your broker.

2. Safety of Funds

In general, as a broker, you will pay a deposit in advance before making any trades to the liquidity provider. Brokers must ensure the safety of liquidity providers so they do not take away your customers’ hard-earned money and run scotch free. As a responsible broker, you should conduct due diligence in advance to fully understand the scale and stability of liquidity provider before engaging into further business.

3. Spread and Commissions

Brokers generally make profits from spreads and commissions. As a result, the lower the spread and commission of the liquidity provider, the more competitive the broker will be in the offer.

4. Execution Quality

In addition to quoting, brokers should also pay attention to the quality of order execution. For example, some liquidity providers provide a very small spread, however, on actual execution, you will be filled on prices with a considerable amount of price slippage even on a small trading size, or else, pend or reject trades on market orders. Therefore, before any broker adopt a new liquidity provider, and waste resources to connect their APIs. It would be a best practice to test or at least hear out views from experienced industry partners on the execution quality of your considered liquidity provider.

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