Positive Attributes of a Good Liquidity Provider

A liquidity crisis aggravates price swings in the financial markets, affecting trading experiences. In the extremely competitive trading industry, this could translate into a decline in trading activity, which means lower revenues for your trading platform and brokerage. Therefore, exchanges and brokers partner with liquidity providers (LPs) to enable fast order execution and minimal slippage. However, choosing a reliable LP from among the plethora in the market can be difficult. Here are a few tips to help you make this crucial decision.

Signs to Watch Out For

Did you know that only 36,000 BTC, out of over 19 million, were left with cryptocurrency exchanges in October 2023? With Bitcoins worth $2 billion withdrawn in Q3, the count of BTC with exchanges hit a multi-year low and was considered a key factor exacerbating volatility across the crypto markets. Reliable liquidity under such circumstances can help your traders capitalise on this volatility. The caveat is that you choose the right LP. Here are some red flags that can significantly narrow down your search.

Questionable Compliance

Regulatory compliance is non-negotiable while operating in the financial ecosystem. It helps brokerages adhere to industry standards and position themselves as trustworthy financial service providers who care about their customers. Following legal guidelines protects both your business and your customer.

Before partnering with an LP, conduct thorough research and ensure that they have procured the necessary licenses to operate in the jurisdictions where you need them. They should also regularly report in the right formats, transparently. The LP must not have a history of penalties due to lack of due diligence or irregularity in audits. Additionally, verify if they operate in regions with poor regulatory frameworks, and ensure that this does not expose your brokerage to unnecessary risks.

Negative Feedback

While positive feedback often needs to be elicited, backlash is organic. A business with a long and sustained track record of complaints and negative feedback is neither trustworthy nor reliable. A dented reputation is a sign of operational, communication, pricing, and customer service issues. Common red flags to watch out for include complaints regarding delayed transactions, poor service quality and insufficient liquidity for certain markets. Another key consideration is their responsiveness to clients and feedback.

Negative feedback tends to indicate that the LP does not prioritise its clients. On the other hand, recognition, and awards from leading organisations in the industry testify to service quality. They highlight the LP’s commitment to excellence in service delivery and maintaining their reputation.

Hidden Terms and Conditions

Transparency and clear communication are key to building lasting relationships. A provider who is not clear about operations, contractual agreements, and associated risks is one to steer clear of. Unfair terms of operation end up marring the experience of the partnership. Lack of communication for customer inquiries or concealing information till it is explicitly requested for can escalate to severe issues once the partnership is established.

Examine these by interacting with the LP through various modes of communication before engaging further. Notice how they maintain transparency across communications and whether they are upfront about terms and risks. 

Unclear Pricing

Just like the conditions of the partnership, pricing structures should be laid out clearly for all markets the LP serves in. Undisclosed costs can affect the profitability of your business and your traders. Extra charges for high volumes and undue commissions translate into added costs, affecting your bottom line.

Before partnering, closely examine the pricing models of the LP. Carefully assess the fees and commission changes with high volumes, and penalties for low trading volumes, if any. Straightforward pricing models with clear descriptions of all costs, minimum and maximum deposits, and trading volumes that fall within the purview of the partnership are must-haves.

Insufficient Experience

Experience level is a key indicator of the assurance of liquidity, consistency, and reliability of services. A liquidity provider with experience across diverse markets over a considerable timeframe has overcome significant challenges to survive in the financial domain. Your LP should understand the dynamics of the financial industry and will have maintained its reputation over the long term.

A short operational history and limited clientele are telltale signs of insufficient experience. No proven history of performance under stressed market conditions may translate into liquidity crunches or operational issues during uncertain times.

Poor Attention to Security

Technology and security form the core of an LP’s offerings. While technology is the instrument to provide deep order books, security is the foundation of uninterrupted operations. Technology and security are essential to minimise spreads and downtime, ensure efficient order execution, and protect against potential threats.

Choosing an LP with insufficient risk management protocols and security measures across the technology infrastructure is potentially opening your business to threats. Untrained technology staff and poor practices can pose risks to your operations and your traders’ assets. The biggest red flag is a lack of comprehensive solutions to offer 360-degree security. Delayed data from the source, vulnerability to market volatility, and a history of fraudulent incidents highlight insufficient security measures and poor or outdated technological frameworks.

Limited Liquidity Pools

To ensure deep institutional-grade liquidity for a wide range of instruments, an LP has to build connections. Tier-1 institutions and reputed exchanges across markets help them maintain extensive liquidity to provide unrestricted trading opportunities for your clients. 

Choose an LP with a strong and wide network and diverse partnerships across markets and geographies preferably, to ensure sufficient liquidity to handle your trade volumes under all market conditions. Assess their ability to deliver the desired liquidity levels across your breadth of offerings.

One True Friend

A liquidity provider with deep order books across multiple instruments is better than multiple ineffective partnerships that escalate due diligence and costs. X Open Hub is a multi-regulated, multi-asset LP, recognised by the industry for their liquidity services. XOH won the coveted award for Best B2B Liquidity Provider – Global at the UF AWARDS Global 2023. It has an in-house team of 600 technicians, and multiple connectivity options with cutting-edge protocols, such as FIX and xAPI, to drive success for its broker partners.

With a focus on best-in-industry security and technology infrastructure, XOH is MiFID II compliant with multiple licenses that passport to 20 countries. It offers custom-made reporting to meet the requirements of Tier-1 regulators. Additionally, 100+ strategic partnerships across 25 countries worldwide, forged over 15 years of operations, ensure uninterrupted liquidity for over 5,000 instruments.

 Contact our team now to bolster your brokerage’s liquidity and offer exceptional trading experiences to your customers.