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.
Selecting a Liquidity Provider – Points to consider:
Trustworthiness of the Liquidity Provider
Before choosing a Liquidity Provider a broker has to check if the LP is regulated. Also, the trustworthiness of the regulator should be verified. It’s advised to choose a public listed company as the LP. The broker will be able to check all the reports, financial stability and condition of the potential partner.
If the broker is signing an agreement with a non-regulated LP, it’s advised to choose a recommended one, that is checked and verified by a reputable vendor.
Nowadays a multi-asset liquidity and deep order book is a must. The instrument list should cover: FX (Forex), Commodities (Agriculture, Emission Rights, Energy, Industrial Metals), Cash Indices and Futures Indices, Bullions (Precious Metals including: Gold, Silver, Platinum, Palladium), Bonds, Equities (Stocks, DMA, Synthetic Stocks, Equities CFDs with leverage), ETFs.
Liquidity Provider should present complete order book via trading platform and via FIX protocol, assuring access to the historical tick data of each level of the order book.
The execution offered by an LP should be fast (at least below 100 ms), without rejects or requotes.
Reliable Liquidity Provider should offer time priority execution and full post-trade transparency (MiFID compliant).
Last but not least, the execution system has to meet high standards especially during the market data releases and unexpected events such as SNB. The broker should be able to check execution using an automated trading software, that allows him to build detailed statistics and searching for the opinions among current clients of a particular LP.
Liquidity Provider should offer not only competitive spreads and commissions, but also low overnight fees. Additionally, the broker has to make sure that futures based instruments (commodities and indices) are not charged with swaps.
Today, only few of the wide range of the well-known Liquidity Providers are offering their proprietary trading technology, that is trustworthy and well accepted by retail clients, but even fewer offer one technology and liquidity turnover fee.
Liquidity Provider should offer stable and reliable feeds without any spikes or gaps on the charts. Feeds should reflect prices from the interbank foreign exchange markets and underlying instruments from a list of stock exchanges. Retail clients and the brokers should have the possibility to compare those prices in a convenient way. Access to historical market data and the tick data is an essential part of the solution as well as complete order book presented via FIX protocol or trading terminal offered by the LP.
A Liquidity Provider who’s quoting instruments based on the offer of certain exchanges, is obliged to have signed a market data redistribution licence agreement. Some of the best LPs have full packages of the market data ready to be implemented by their partners.
Reporting – 0nly the best Liquidity Providers offer full reporting packages including:
- Email reporting
- Full reconciliation reporting
- Closed and open trades reporting from the given period
- FIX bridge reporting
- Profitability reporting
- Swap points reporting
- Rollover reporting
- Hedging adequacy reporting
- Tick data and historical order book access
- Multiple integration options
The best Liquidity Providers have a full range of solutions ready to be implemented for their partners:
- FIX protocol connection
- MT4 bridge and MT5 bridge connection
- MT4 Gateways
- Connections via reputable MT4 and MT5 bridge providers.
FIX protocol and M4 bridge or MT5 bridge installation.
The most reputable Liquidity Providers very often have a set of FIX bridge providers already integrated into their trading environment.
Brokers can choose from the range of IT companies offering such products on the market. However, it can be beneficial for both counterparties to evaluate and select potential vendor together in order to make sure that all the points mentioned below were considered:
- Integration time and flexibility of the connection
- Stability and reliability of the integration
- Multiple LP connections options together with integrated BBO or iBBO model.
Enhanced spreads for STP and ECN brokers
The best Liquidity Providers are able to offer significantly improved spreads and much lower fees for retail brokers working in STP/ECN models, as they are focused on increasing volumes under their own pools of liquidity.