The foreign exchange market (forex) involves high-volume CFD trades across the globe. It’s one of the most diverse and liquid markets available to brokers and high-net-worth individuals.
To succeed in this market, forex brokers need liquidity to rapidly close positions, maximize their profits, and protect their clients’ investments.
The good news is that forex liquidity partners offer liquidity to brokers to help them improve order execution speed and hedge against market volatility.
Are you curious about how a forex liquidity partner can help you? In this guide, we’ll cover the basics of forex liquidity and give you a rundown of how a liquidity partner can benefit your brokerage.
Forex liquidity is the simplicity with which a currency pair can be bought or sold without significantly affecting its exchange rate. This type of transaction takes place over the counter.
When people easily exchange a currency pair without market slippage, then it’s considered a liquid currency.
Liquidity can vary based on a wide range of factors, such as:
Liquidity can also affect trading conditions and spreads. The more liquid a currency pair is, the more advantageous trading conditions will be to brokers. This increases market buy-in, stabilizes cryptocurrency prices, and contributes to a healthy global economy.
When a currency pair isn’t liquid, market volatility will follow. This means that prices will constantly fluctuate and cause slippage. When brokers aren’t sure if their expected trade price will mirror the executed price, they become less hesitant to engage the market.
For this reason, reluctant brokers can cause market volatility to spiral out of control. This is where the importance of having a forex liquidity partner becomes clear.
Forex liquidity partners offer efficient fiat on/off ramping, meaning they can facilitate forex conversions with little slippage. To accomplish this, these entities rely on banking relationships.
By partnering with a banking as a service (BaaS) provider, liquidity providers can broker white-label access to fiat on/off ramping to drive high-volume currency trades.
A forex liquidity partner (LP) is a company that has trading assets in their own accounts to fulfill client orders from brokers. To maximize the liquidity of the forex market, LPs facilitate the transaction process by already having assets at their disposal.
This way, buyers and sellers aren’t waiting too long to complete their orders, and the market moves quickly.
LPs can influence market depth by ensuring large market orders can be fulfilled without significantly affecting security prices. To keep worldwide markets healthy, there are strong liquidity providers, market makers, and brokers.
All of these parties participate in the forex market to keep liquidity high and maintain stable exchange rates. To better explain this point, let’s discuss the nature of forex liquidity providers.
Forex liquidity providers act as counterparties during global transactions. Essentially, they execute a customer’s order by matching them with another buyer or their own assets.
In facilitating forex transactions, liquidity providers act as market makers and greatly influence market volatility. The easier it is for liquidity providers to execute their clients’ orders, the more liquidity will exist in that market.
Many liquidity providers exist in the forex market to help facilitate efficient currency exchanges. The most common liquidity providers are:
In order for financial institutions to provide liquidity pools to their customers, they must hold liquid assets. Financial assets held by banks and other intermediaries are classified into tiers:
As you can see, liquidity partners that hold asset classes are more reliable in the long term. They have plenty of liquid assets on hand to stabilize a market’s position.
Liquidity providers can offer protection against market manipulation and other negative effects.
But that’s not all. Let’s examine some of the greatest advantages of partnering with a forex liquidity partner.
Market manipulation is deliberately attempting to hijack market activity with misleading information and fraud. One of the most notorious forms of market manipulation is reporting false information to shareholders.
During major company news releases, ask prices can fluctuate significantly. Depending on the validity of this information, price fluctuations can deter traders and create slippage.
As a result, having access to deep market liquidity pools can offer more stable pricing during major news releases. The good news is that blockchain technology makes it possible for prime brokers to take advantage of deep liquidity pools.
In particular, AlphaPoint offers excellent liquidity solutions for brokers who want to hedge against chaotic news releases and protect their investments.
Liquidity partners that own high-tier assets are more reliable in the long term. These entities have substantial liquid assets on hand to take on enormous market risk.
They can also offer competitive pricing and spreads to their customers, which is ideal for long-term forex trading profitability. The rise of blockchain technology can potentially deepen liquidity pools for traders and maintain risk management on their end.
The decentralized nature of blockchain technology makes it possible for financial institutions to use smart contracts to gather precious assets and build deep liquidity pools.
Forex liquidity partners rely on cutting-edge technological systems that support rapid trade execution.
The faster trades can take place, the more stable market prices tend to be. By partnering with a liquidity partner, you can ensure there are plenty of market participants ready to open and close positions quickly.
This is essential for traders who specialize in scalping and want to secure short-term gains as quickly as possible.
Slippage is a negative attribute of any market. Liquidity partners keep markets transparent, reducing likelihood of slippage.
For example, forex liquidity partners enhance trade execution to keep expected and actual currency exchange rates similar.
Fortunately, liquidity providers can prevent flash crashes or extreme volatility. Liquidity ensures buyers and sellers can quickly close positions, creating a fair trading environment for everyone.
By now, you should know the importance of partnering with a forex liquidity provider. However, some providers are better suited for your trading needs than others. Here are some effective tips for choosing the right Forex liquidity provider.
Liquidity providers are ranked according to the reliability of their assets, technological infrastructure, and pricing:
Simply put, tier-1 liquidity providers are the best to work with. These providers use cutting-edge technology to positively influence forex markets. Doing business with a low-tier liquidity provider can be disastrous since they don’t have enough cash on hand to influence high trading volumes.
Brokers and traders can run into a conflict of interest if it looks like a broker is capitalizing from a trader’s loss. With ECNs and STPs, brokers can only profit from spreads, eliminating this risk completely.
Also, brokers can improve trade execution speeds by partnering with multiple liquidity providers and offering competitive spreads as a result.
It’s important to pay close attention when shortlisting liquidity partners. Specifically, watch out for hidden terms or conditions in LP contracts.
For example, beware of LPs that don’t mention the classification of their assets. If this information isn’t listed in your contract, you could risk not getting an acceptable return for your investment.
Having a clear understanding of what each provider offers can help you make the right decision and avoid buyer’s remorse.
Monetary policy regulations can affect any financial market. Thus, learning about the international regulations that influence liquidity provider operations is essential.
Since forex spans the globe, there are several regional regulations to consider. For example, the UK plans to introduce crypto regulations to prevent market abuse in 2024.
Partnering with non-compliant providers can result in legal penalties and fiduciary ramifications for your clients. Most compliant LPs work with the Financial Action Task Force (FATF) to prevent global money laundering and terrorist activities.
Liquidity solutions are essential to manage the relationship between brokers and traders. Having access to deep liquidity pools gives brokers the means to act in the best interest of traders and keep forex markets agile.
With AlphaPoint, access to those deep liquidity pools is exactly what you get. Our team has over a decade of experience helping businesses innovate their financial offerings. Through our liquidity partners and Remarketer software, AlphaPoint provides customers with a wider range of high-quality liquidity products.
Our deep expertise in blockchain technology, exchange operations, and liquidity solutions put us at the forefront of the financial revolution. AlphaPoint can even offer valuable insights into how these concepts might shape the future of traditional financial and forex markets — and how our customers can use them to enhance their business offerings.
Request a demo to see how AlphaPoint can empower your business with our liquidity solutions.
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