Financial markets are highly dynamic and interconnected. For the average user, it is all about market order execution and processing payments.
On the back end, a sophisticated system of service providers, liquidity companies and financial institutions makes tradable instruments available and connects buyers with sellers.
Liquidity providers are one of the most important pieces of the equation, supplying the market with products and giving access to various order books. Brokerage companies find the best liquidity providers to offer trading opportunities to their clients. Let’s dive deeper into how LPs work and how you can find a reliable partner.
Introducing Liquidity Providers
Large financial institutions, investment firms and banks are called liquidity providers because they supply the market with tradable assets and instruments. Thus, they make marketplaces “liquid”.
Liquidity is associated with how easily a trader can execute a market order with minimum price slippage. Highly liquid markets are characterised by increased supply, which results in a tight spread range or a smaller difference between the buying and selling prices.
Slippage is a crucial benefit of liquid markets. When liquidity is low, platforms take more time to find a matching order. A market order can be executed at a slightly different rate when it stays “pending” for a few seconds, which makes a specific market inefficient.
How to Identify the Perfect LP
Liquidity providers employ a broad network of liquidity pools, hedge funds and investment firms to provide assets. Thus, brokerage companies always seek the best liquidity provider using these criteria.
Liquidity providers offer a range of tradable securities that may include CFD trading, options and futures contracts. Providers use multiple order books where pending trades are listed to match them with suitable trading requests.
Therefore, ensure the provider offers a wide range of tradable securities, especially the most demanded ones, like Forex currencies, cryptos and stock CFDs.
Liquidity companies imply various service charges, ranging from setup costs to transaction and maintenance fees. Therefore, check out the pricing policy of the provider and only settle for the one that meets your business needs and budget.
Working with a regulated provider is crucial, which earns you peace of mind and durability. Moreover, having an unregulated liquidity pool is associated with the risk of default or insolvency, leaving the brokerage company and its clients without any trading options.
Liquidity providers are critical market players that make trading seamless and affordable. These companies include large financial corporations, central and commercial banks, and investment firms continuously engaging in the trading markets.
Finding the best liquidity partner is challenging and requires careful selection and review of offered services, fees and working permits.