When we decide to enter live trade with a forex broker, one among the few key factors that we have to scrutinize over is, who is their liquidity provider? The third-party agency run an important role to sustain the market ongoing rapid transactions.
When we decide to enter live trade with a broker, one of the few key factors that we have to scrutinize over is, who is their liquidity provider? Those third party agencies run an important role to sustain market ongoing rapid transactions. Now, do you already recognize your liquidity provider and their practical role within the forex market?
Liquidity providers is generally a group of financial institutions within broker's network into forex market, where each agency will transmit ask and bid prices in continuous streams. Each liquidity provider agency may connect to more than one brokerage and vice-versa.
Why Do We need Liquidity Provider?
Forex becomes the largest market with the highest liquidity because of these two factors; the balance between the strength of buyers and sellers, and the ceaseless stream of offer and bid orders. Those two factors are sustained by liquidity providers.
If we were to negate or subtract liquidity provider agencies from market circulations, the most direct impact that may occur is the widening spread rate. How so?
Trading volume at the retail level is not as significant as transactions between large banks or financial institutions. Without mediating liquidity provider, bid and ask price between retail trader most likely will not meet expected prices. A trader with a bigger lot may buy or sell at higher-than-average prices. Subsequently, other traders with smaller lots are forced with a higher spread to enter the market.
Do you recall what happened during the SNBomb incident? Those critical moments took place because major liquidity providers abruptly left the forex market to prevent their assets meltdown. In consequence, the spread rate instantaneously split apart uncontrollably. Many traders suffered negative account balance, and in turn, brokerages and other liquidity providers that stayed in the market during that moment got hit by huge losses.
That is why we need liquidity providers as a mediator as well as market makers with competitive ask and bid prices so that the spread rate gap is narrowed. Therefore, as retail traders, we can gain an advantage with a smaller and competitive spread rate as trading costs.
Recognize And Review Liquidity Providers Credibility
The foremost aspect that we have to know is the legality and the reputation of your broker's liquidity provider. Check whether if those institutions are legally registered in their respective regions.
When in doubt, ask your broker's support team, who is their liquidity provider. Generally, NDD (no-dealing-desk) brokers will inform or announce institutional banks or prime-brokers as their liquidity providers. Here are some examples of world-acknowledged large investment banks; Deutsche Bank, Goldman Sachs, UBS, Morgan Stanley, JP Morgan Chase, Citibank, Nomura, BNP Paribas, and so on.
Secondly, the transmission of ask and bid prices will be shown as a sell and buy prices in your trading platform. Check carefully as to how often your requested price is executed precisely or occasionally slipped on pending orders.
Next, broker connectivity with liquidity providers is supported by their trading platform. Usually, a brokerage with connectivity to the interbank will provide trading platforms like cTrader. By contrast, a brokerage with a dealing-desk environment will use its own circle as an exclusive liquidity provider.
There you go! Now you understand how important liquidity providers are and their general role. If you have anything else to add, please share your comments below.
Liquidity Providers like major banks can offer retail trading services too. How so and why do they decide to expand in this industry? Learn all about it in 5 Major Banks Offering Retail Forex Trading.