How to choose a liquidity provider

Liquidity is an essential part of the financial market and is effectively the ‘grease’ to the engine of the economy. If liquidity is low, then trades and transactions are harder to fill, and generally, trading is slower. High liquidity in the markets is positive, as this means there is always money freely changing hands.

A liquidity provider can help you smooth out transactions, stabilise your prices and also save money on spread costs, as well as a myriad of other reasons.

Choosing the right liquidity provider is crucial for any financial institution, brokerage or trading platform, as it is essentially one of the foundations of your business. A liquidity provider can affect trade execution, spreads, market access and overall satisfaction of your clients. Making the wrong choice could be incredibly disruptive.

In this article, we will be outlining exactly how to find a liquidity provider that is right for you.

What is a liquidity provider for?

Before making the decision about whether you need a liquidity provider, it’s important to define what you need the liquidity for. 

A liquidity provider can help you:

• Launch a new financial product
• Smooth out existing trades
• Save money on spread costs

However, before you decide on a liquidity provider, you will need to assess which type of liquidity provider could be right for you.

Types of liquidity providers

There are many types of liquidity providers, each one best suited for different types of businesses. At LiquidityFinder, we have a range of types for you to pick from. You can see the list of all our providers on our website.

Here are just some of the liquidity provider types we have on LiquidityFinder.

1. Aggregator Providers 

Aggregator providers bring together liquidity from multiple liquidity providers, which could be banks or regular liquidity providers and market makers.

It allows clients to access a wide range of liquidity sourced from multiple places and provides clients with the best possible bid and ask price.

Examples include FXSpotStream and Integral.

2. Broker Providers

Broker providers are essentially the middlemen between buyers and sellers in the market, and can execute trades on behalf of a client.

Examples include ACY Partners and ActivTrades.

3. Crypto Exchanges

Crypto exchange providers are a great way to access the nascent crypto market. Institutions can access the market and obtain efficient price discovery with deep liquidity. Crypto is a relatively new industry, and can often be lacking in security and regulation, but by using a crypto exchange provider, you can ensure that your company is approaching the market securely.

Examples include LMAX Digital and Nexo Prime.

4. ECN Providers 

ECN providers help clients obtain access to ECNs (Electronic Communication Networks). These providers connect traders to the market and provide access to interbank liquidity pools.

ECNs can provide tighter spreads and faster execution, as the orders are made electronically, and therefore instantly, instead of going through a desk.

DMALink is an example.

5. Bank Providers & Non-Bank Providers

Traditional banks can be a source of liquidity, and bank providers are often a part of the trading process by default. 

Non-bank providers are providers which are explicitly not banks, but instead, provide liquidity in various markets via other financial institutions.

Examples of non-bank providers include CMC Markets Connect and MFP Trading.

6. Prime Broker Providers

Prime broker providers are larger financial organisations that provide a wide range of services to hedge funds and investment firms, with liquidity sourced from banks and other large firms. Normally to work with a prime broker, a client must have a minimum account size.

An example of a prime broker is StoneX Pro.

7. Prime of Prime Providers 

Prime of prime providers allow access to Tier-1 liquidity providers, in simple terms, big banks. Smaller FX brokerages are often not able to directly access these banks, but via a prime of prime provider, they can access the larger liquidity pools. If your firm doesn't meet the minimum account size requirement for a prime broker, then a prime of prime provider could be an option for you.

Examples of prime of prime providers include Finalto and 26 Degrees.

8. Money Markets

Money markets are a section of the market where clients can obtain short-term lending and debt investments. 

An example of a money markets trading platform is Instimatch Global.

9. MPC Network Providers

MPC network providers are another way in which clients can access the cryptocurrency market. Multi-party computation (MPC) is a protocol which allows users to secure and move digital assets without private keys. Essentially, it creates a smoother system for digital assets, which is also much more secure.

An example of an MPC network provider is Qredo – you can also read more about MPC providers on its website.

How to choose the best liquidity provider

Once you have a category of liquidity provider in mind, choosing the specific liquidity provider for your needs is the next challenge. There are some factors for your own business to consider, such as the size as well as your depth in the market, and whether this will fit with your chosen provider.

Here are some things to consider before picking a provider.

Purpose

The exact purpose of your liquidity is perhaps the first and most crucial step. By deciding exactly what you need the liquidity for, you will be able to find a liquidity provider that can provide you the service you need.

If you’re unsure of your liquidity requirements, then we encourage you to use our Match Matrix tool to help you find the liquidity provider that is right for you.

Size & pricing 

The size of your own firm is another important factor to consider. If you are a larger institution, then you may have to find a liquidity provider that can handle the amount of liquidity that you require. Conversely, if you are a smaller firm, you may have difficulty sourcing liquidity from higher institutions and may require a provider who can help you with this.

Keep in mind that you will also not be the same size forever. Scalability must be taken into account, and you should consider whether a liquidity provider has the capacity to scale alongside you.

Security & compliance

When choosing a liquidity provider, it’s important to assess the liquidity provider for security and make sure that your funds and also data are protected. Regulatory compliance is also a necessity – liquidity providers must operate under the jurisdiction of a financial institution, depending on the country they are in. 

Technology

Sufficient technology is a must for choosing a liquidity provider, particularly if you are handling larger trades. Ensure that your chosen liquidity provider has MT4 or MT5, or at least a white-label alternative that means they have access to the market with low-latency connectivity.

Using LiquidityFinder

Choosing a liquidity provider can be difficult, and with overchoice in the industry, it can be difficult to know who to trust. However, this is where LiquidityFinder provides a solution.

We are committed to improving transparency in the financial markets and helping businesses find well-matched and suitable liquidity providers and industry contacts.

At LiquidityFinder, we have designed a tool called the Match Matrix. By answering a series of questions in our intuitive questionnaire, we will be able to narrow down our liquidity providers and suggest the best options for you.

Alternatively, you can post your liquidity request, to submit your request to multiple verified providers on our site.

If you have any questions about either of these processes, feel free to message Sam Low on LiquidityFinder.

Author

Caleb is a financial copywriter with a specialisation in fintech and forex. Former copywriter at Barclays and Paysafe. Contributing writer for LiquidityFinder. You can message Caleb here.