HOW DOES IT WORK?

Liquidity providers have various strategies to assure the best possible liquidity. Trading and nowadays also robust IT Departments in the largest banks and brokerage houses are working 24/6 directly connected to stock exchanges, ECN banking systems and other STP brokers, checking their exposure, measuring their risks and finally making sure that there is always a bid and ask side with a tight spreads and sufficient volume of any traded asset.

The biggest and the most reliable liquidity providers are not only sending all the flow to stock exchanges, ECNs or even dark pools but can also internalize some of the flow delivered by their clients. The volumes sent by their customers are sustainable enough to net and execute the trades in milliseconds assuring better spreads and limiting the risk of any slippage. In other words, the biggest liquidity providers sometimes might act similar to multilateral trading facilities (MTFs).

HOW TO CHOOSE THE BEST PROVIDER?

Choosing a Liquidity Provider (LP) is a demanding process, therefore a detailed analysis of pricing, economic efficiency, effectiveness of the trading infrastructure, surveillance of the IT systems, legal aspects and due diligence of the vendor should be conducted.

The following recommended list of qualification questions and considerations was created in order to help a broker to evaluate and choose the best possible liquidity provider.

The list should not be viewed as a complete list of points to be discussed, but rather as a framework for the most productive conversation possible when selecting the best LP.