Tue. Jan 25th, 2022

When trading Forex, the term liquidity often occurs. Access to liquidity and the role of a liquidity provider and that of a liquidity broker are often confused. As basic as they may seem, it is important to clarify the terms so that you can become familiar with the features of these market concepts and the benefits they can offer.

Liquidity provider

What is liquidity in the Forex world

According to the Oxford dictionary, the first definition of liquidity isthe availability of liquid assets in a market or company ”, being liquid assets understood here as“ cash ”. Therefore, cash is considered as valuable as a liquid, hence the term “liquidity”. But, as you know, in Forex or LXCapital, liquidity has a specific meaning and ours is a different liquid.

Liquidity in Forex is used to describe the level of activity that takes place in the financial market. This is very important when trading different currencies, as the number of active traders buying and selling a specific pair, for example EUR / USD, and the volume traded is very important in a market based on speculation. The more frequently something is traded, the greater its liquidity. The Forex liquid is not effective, but activity.

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High liquidity or frequent activity does not always mean higher prices. The activity may correspond to a fall in price. Higher liquidity means faster changes and higher volatility, which lowers spreads and the cost of trading. Because Fiat currencies are connected to governments, information belonging to the country or government where a particular currency comes from can increase or decrease market liquidity.

If more people change the EUR / USD currency pair and have higher volumes than the YEN / USD, it means that the former has more liquidity than the latter. The reason the currency market is so liquid is the fact that it does not close and opens 24 hours a day on weekdays. It’s also a big market, with about $ 6 trillion in business every day. This means that while certain markets may be closed worldwide and liquidity fluctuates, there are usually relatively high foreign exchange trading volumes that are constantly evolving.

What is a liquidity provider?

A liquidity provider is essential when opening a Forex brokerage. This broker or institution is the one who sends and executes operations.
This feature has a revolving door purpose in the market by selling and buying a particular asset class. Standing at each end of a currency deal makes the FX liquidity provider a market “manufacturer”. This is why it is called the liquidity provider: it provides and produces the liquidity that the market requires.

Forex Liquidity Provider Broker

A Forex liquidity provider broker should be an institution or person above suspicion in order to meet the highest standards. It must be stable, reliable and must have a depth of resources in a myriad of instruments. A good trading platform already offers liquidity solutions, but that doesn’t excuse you from doing your homework. As an intermediary, you should spend some time choosing a liquidity provider, just as you would like to choose a Forex CRM and do a detailed analysis of prices, economic efficiency, efficiency of trading infrastructure, systems monitoring. computer science, path to legal aspects, including due diligence.

How can you choose a liquidity change?

Here are some features to keep in mind when looking for a liquidity provider. This is not so much a list of features, but a framework for rolling the ball and you can ask the right questions when selecting a Forex broker liquidity provider.

  • Diversified instruments
    • Today it is essential for a broker liquidity provider to have liquidity for various assets and to have a deep order book. The list of market tools should include FX (Forex), bonds, equities (stocks, DMA, synthetic stocks), equity CFDs with leverage commodities (agriculture, emission rights, energy, metals industrial), cash and futures indices, bullion (precious metals including gold, silver, platinum, palladium) and ETFs. A liquidity provider will need to present you with a complete order book through the trading platform and through the FIX protocol, where you will be able to access historical tick data for each level of the order book.
  • Regulation, compliance and trust
    • A liquidity provider should have a regulatory status and disclose under what regulation it is regulated. Unregulated liquidity FX providers are dangerous for those who deposit funds. Anyone who insists on doing so does so at their own risk. In addition, the reliability of the regulatory body must be verified. It is recommended to choose a listed company as a provider of liquidity cash. As an intermediary, you should be able to check all the reports, financial stability and conditions of the potential partner
  • Speed ​​and reliability in the execution of the trade
    • A good FX liquidity provider should offer time as a priority execution and full post-trade transparency. The execution system should be detailed especially during market data releases and unexpected events like SNB. You should be able to easily check the execution of the trade using an automated trading program or application that will allow you to create detailed statistics.
  • Liquidity prices
    • Make sure your FX liquidity provider offers competitive differences and commissions and nightly rates. Verify that futures-based instruments, such as commodities and indices, are not loaded with swaps.
  • Information feed
    • A Forex liquidity provider broker must provide stable and reliable feeds without any rises or gaps in the charts. This information should act as a mirror that accurately represents the prices of the different interbank foreign exchange markets. They cannot deviate an inch from the valuations of the different stock exchanges. You should be able to compare these prices appropriately. Access to historical market data and raw data is an essential part of the service along with a complete order book submitted through the FIX protocol or trading terminal offered by the Forex broker liquidity provider.
  • Solutions you should expect from an FX liquidity provider
    • API
    • FIX protocol connection
    • MT4 bridge and MT5 bridge connection
    • MT4 walkways
    • Connections via serious MT4 and MT5 bridge providers
  • Market data
    • Any FX liquidity provider that makes quotes for instruments based on the offer of certain stock exchanges must sign a market data redistribution license agreement. Some of the best liquidity providers have complete market data packages ready to be implemented by their partners.
David Rosh Pina

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