Behind every price movement on a trading screen lies a series of institutions that most traders don’t see. No one is talking about it or releasing it, but that price is negotiated, quoted, and altered at the millisecond before it ever shows up on a chart on a chart sheet, by banks, electronic market makers, prime brokers, and aggregators. This is the whole chain that the trading industry is referring to when it discusses deep and stable markets or thin and jumpy markets.
Not very much to say about the magnitude of movement that passes through this chain. In April 2025, the average daily turnover in over-the-counter foreign exchange markets rose to $9.6 trillion, 28% higher than three years before in April 2022 and the highest since the BIS started tracking the market in 1986, according to the Bank for International Settlements’ 2025 Triennial Survey, the most comprehensive study of global currency markets available. That number is the reason why the question of liquidity providers and the quality of their service has become one of the more critical decisions a brokerage or serious trader considering a brokerage can make.
Many, many people look for “liquid brokers” when they mean liquidity brokers or liquidity providers: the institutions that feed buy and sell prices into the market, and make it possible for a broker to fill an order at a price that is reflective of what actually is happening in the world, not an over-invented number. A lot of terms are used interchangeably by the industry and that is something that needs to be sorted out before anything else, as it depends on which part of the chain is being talked about.
People actually mean by the term Liquidity Broker
In practice, it encompasses three roles, and a lot of confusion in this area is from folks using the term “liquidity broker” to describe all three of them when they don’t mean all three.
The first is the liquidity provider, who can be a bank, a non-bank market maker, or a special trading firm that quotes bid/ask prices for a currency pair, commodity, index, or crypto asset and is willing to make the market. This is the most elemental form of liquidity, a quote that can be traded in, and a risk appetite that has been turned into capital.
The second is called Prime of Prime, or PoP, which does not create its own liquidity but rather pools together liquidity from various Tier 1 and non-bank sources, packages it into one connection and resells access to brokers lacking the balance sheet and credit history to go to a global bank directly. The reality is that the retail-facing brokerage does not actually get a raw feed from the bank it gets a PoP relationship.
The third is the retail/institutional brokerage, which receives that pooled liquidity, imposes his/her mark-up or commission, and quotes the final price to end traders. Some of these brokers send each trade directly to their liquidity provider, typically referred to as straight-through processing (STP). Others keep some or all of that flow, and thus act as a counterparty for their own clients. This is typically referred to as market making, or “B-booking”.
All of this is neither bad nor good, each model has a role and there are plenty of well-regulated, reputable firms that run every version of it. How a broker or a liquidity partner treats a customer is what matters to anyone looking to assess that customer’s broker or liquidity partner. The risks, incentives and regulatory duties that come with each role are different and meaningful.
The Hierarchy Nobody Shows You: From Tier 1 Banks to Your Trading Screen
Forex and CFD markets are not a single pool from which all are drawn equally. It is more of a pyramid hierarchy where there are a few big players pushing stuff down at the top and the rest of the players at the bottom are taking a slice of that.
The top tier is the Tier 1 banks, such as JPMorgan, Citi, Barclays, Deutsche Bank and UBS, whose credit lines operate in the interbank market, and who have huge balance sheets with which they trade directly. An immediate price relationship with any of these institutions often requires tens of millions of dollars of capital, a formal credit approval process and a regulatory profile which a trading company, let alone a single trader, does not have. A newer type of non-bank EMMs has emerged and now rivals banks in a number of pairs. Many companies, such as XTX Markets and Citadel Securities, now produce enormous quantities of quoting activity through algorithmic pricing methods instead of traders, and in some measures of liquidity, non-bank activity is on par with or superior to that of traditional banks.
Underneath are the companies that other brokers are in direct contact with: Prime of Prime firms and multi-asset liquidity aggregators. There are a few firms within this realm, including B2Broker, LMAX Group, Finalto, IS Prime, GBE Prime, X Open Hub and Advanced Markets Group, who are aggregating the pricing from dozens of underlying sources to resell that depth as a single connection that a mid-sized or growing brokerage can connect to without establishing its own prime brokerage relationship. For example, B2Broker brings together over 50 liquidity sources, making them available for more than 1,500 of its over 10 asset classes of tradable instruments, which is pretty standard for the size at which these types of businesses are now operating. In the day-to-day discussion of industry, the term “liquidity broker” is most often used on this layer.
Finally, the bottom of the chain is the broker that a retail trader will open an account with. That firm aggregates the feed, adds its own spread markup or a commission, routes trades in the manner it wants to execute them and publishes the spread on MT4, MT5, or its own platform. It is important to realize the degree of concentration of this chain at its upper end. Industry analysis of dealer market share suggests that the top five liquidity dealers have approximately 45% of the trading volume of the FX market in the world. It’s a two-way street. So if there are just a few big players out there all actively quoting, then spreads at the institutional level can be extraordinarily tight, down to just a few pips, and execution can be extraordinarily efficient. However, at times of extreme volatility or in times of a real shock, liquidity can run out much faster than most players realize because there isn’t enough of an alternative source to fill the void.
Get to know why liquidity brokers will be more important in 2026
The 2025 Triennial Survey not only records growth, but it also caught a market in the middle of an unusual period of stress, making the data particularly valuable for gaining insight into how liquidity truly reacts to stress. It was during the survey period in April 2025, as a series of tariff announcements from major economies led to some of the largest currency swirls in years. Because of that context, the $9.6 trillion number isn’t solely a measure of structural growth in trading volumes, but rather a test of the whole liquidity chain outlined above in the real world.
Decomposing the number tells its story. The most basic and direct method of currency conversion, spot trading, grew to about $3 trillion per day, accounting for 28% to 31% of the volume of trading. Outright forwards, where the market participants go when they want to lock in a future exchange rate, increased even more, rising to about $1.8 trillion per day and 19% of total turnover, versus 15% three years ago. Despite the decline in the number of FX swaps from the 51% share of the market to 42%, they are still the largest instrument by volume at around $4 trillion per day, with other instruments’ shares of the overall market increasing at a faster pace. FX options more than doubled during the same time, illustrating the extent of hedging activity that increased as uncertainty swept through the global markets during that time frame.
Currency-level detail is just as telling. The US dollar continued to be the vehicle currency in the market, with 89.2% of all trades occurring in the dollar compared to 88.4% in 2022. The euro’s stake dropped to 28.9% from 30.6% while sterling’s share decreased to 10.2%, up from 12.9%. Meanwhile, the Chinese renminbi and the Swiss franc both strengthened, rising by 8.5% and 6.4%, respectively. Geographically, trading is also concentrated in a few financial centres, accounted for by the UK, the US, Singapore and Hong Kong, which account for some 75% of global trading by the location of the sales desks, with the UK accounting for about 38%. Singapore’s trading hub, which is the first in this survey to see daily trading turnover exceed the trillion-dollar mark for the first time, is a testament to the increasing dominance of institutional trading at Asian hours.
An estimate of $2.16 trillion per day is the growth of activity flow through prime brokerage relationships that was worth special note in the data, rising by approximately 64% from 2022 to 2025. That’s a much quicker pace of growth than the market in general and it’s a sign of a trend to focus more on prime and Prime of Prime relationships than on bilateral transactions as markets have become more electronic and volatile, so has the value of the credit intermediation and aggregated access these relationships offer in the market.
The Main Categories of Liquidity Providers Brokers Actually Connect To
Liquidity providers shouldn’t be considered only according to their position within the chain, but rather their source and pricing of liquidity, which has a much more significant impact on execution than most marketing literature would have you believe.
Tier 1 banks price on their own balance sheets and global flow information, so when they are not stressed, they have deep, relatively stable liquidity in key pairs, but it is only for the largest institutional counterparties. The non-bank electronic market makers, on the other hand, do not have a trader that they depend on, they’re almost solely reliant on mathematical models and the speed of infrastructure, allowing them to quote extremely tight spreads and adjust prices in fractions of a second. One of the best examples is the case of XTX Markets, a firm that has emerged as one of the leading sources of electronic pricing for FX and equities, especially due to its ability to process large amounts of data and to be able to reprice at any given moment without the lag time caused by human input.
There are again exchange-style venues. LMAX Group is a regulated, exchange-like trading venue for FX and crypto that would not rely on a bilateral dealing relationship but has earned a reputation for some of its other characteristics, including a no last look model, which requires that a quoted price cannot be pulled or requoted once a counterparty seeks to trade against it. But that’s one of the more significant and often-misunderstood differences between liquidity sources and one we’ll cover in greater depth later.
Then there’s the Prime of Prime category, which isn’t so much a liquidity source as a liquidity department-in-a-box for those brokers who can’t assemble their own. Solutions to the problem of access exist in this space: Advanced Markets Group, which serves more than 40,000 clients in more than 30 countries, and IS Prime, which offers flexible pricing arrangements and FCA regulation. They have the credit relationships, infrastructure, and the other things that a growing broker just cannot afford to invest in, and they sell that access to them at an above/below market rate that is less expensive than building it up themselves.
Crypto liquidity is a whole new category on its own and has become rather complex in a short period. Again, there is no interbank alternative to digital assets, liquidity is not concentrated in a single exchange or decentralized venue or OTC desk, all of which have different order books and settlement processes. This fragmentation has made it more than just a nice-to-have for crypto prime brokers and liquidity providers, especially when it comes to brokers looking to provide crypto CFDs and forex products on a single risk and margin basis.
Inside the Plumbing: Aggregation Engines, Bridges, and FIX Connectivity
Without the technology that physically moves this liquidity from a provider’s pricing engine to a broker’s trading platform, none of this liquidity would be available for traders to use and this is the least-known part of the industry to traders but arguably most critical to the quality of execution.
The process is in the middle of aggregation. An aggregation engine receives many price feeds from several different liquidity providers at one time, compares them in real time, and generates a composite best bid/ask, which represents the best and deepest pricing from all the connected liquidity providers at that moment. That’s what enables a broker that has six or eight different liquidity providers to display a tighter spread than any individual liquidity provider could do on its own, as the aggregation logic is always measuring the best available price from all the providers.
It is then necessary for that aggregated feed to be able to reach an actual trading platform, and that’s where bridge technology comes in. Meanwhile, liquidity sources such as PrimeXM, oneZero and Gold-i have become the default “glue” between liquidity sources and platforms like MT4 and MT5, which process the routing, mark-up and risk management logic that lies between the raw price feed and what a trader actually sees. But newer players such as Spotware’s cBridge are taking it one step further, targeting the Prime and Prime of Prime brokers that are looking to bring their liquidity together and control it from one gateway across several venues. The FIX protocol has been the backbone of trading communications for decades, since it’s fast, standardized, and widely supported across the financial industry, and is the technical standard used by most of this institutional connectivity.
This stack has a lot of importance on latency, more than any non-technical reader would guess. During a fast-moving news story, a single-digit millisecond pricing differential can make all the difference and that’s why serious liquidity providers and brokers invest heavily in their low latency infrastructure, and at times even physically collocate their servers closer to major trading venues. Smart order routing, which automatically routes orders to the connected liquidity source with the best available execution at the time, and not just a single fixed destination, is now more of an expected and accepted feature among institutional-grade brokers. It’s become a differentiator, in fact, because the technology to do it effectively has become much more widely available in recent years.
How Liquidity Brokers and Their Clients Actually Make Money
As much as it’s important to understand the tech used in a liquidity relationship, it’s just as critical to grasp the business model behind it, since it influences the incentives at stake every time an order is filled.
A straight-through processing model refers to a broker that sends the orders of its clients to its liquidity providers without taking the opposing side. The revenue is generated from the markup of raw spread, per trade commission, or a combination of both. Under this model, the broker makes no money if the client loses a trade, so his financial incentives, at least in the structure, are to provide the client with the best possible execution. The more the spread, the slower the fill rate, the less competitive the platform.
There are other types of trades, like market making or B-booking, which operate differently. In this case, rather than routing some or all of clients’ trades through to an external liquidity provider, the broker takes the opposite side of the trades and gains when clients lose, and loses when they win, in this case. Not necessarily predatory. Many well-regulated market makers manage this exposure with great care and prudence, hedge their overall exposure in the wholesale market and provide excellent execution and regulators need to provide clear conflict-of-interest disclosure because this is a common and perfectly legal model of managing it. But the incentive structure is very different from the STP relationship and that’s why, in big jurisdictions, regulators are increasingly mandating that brokers reveal their execution model and, in some instances, publish execution quality statistics.
Today, most brokers employ hybrids: internalizing smaller or less risky flow and sending larger or more direction of flow, and higher-risk orders out to external liquidity providers, trade-by-trade, depending on what is better for the overall risk exposure of the broker. Close to an industry standard for the most part, especially for brokers that have expanded beyond their infancy, is this hybrid strategy, as it allows a broker to reap the benefits of flow the firm is comfortable with internally, while relying on Prime of Prime and Tier 1 relationships for the remainder.
The Regulatory Landscape Reshaping How Brokers Source Liquidity
One of the largest influences on the type of liquidity providers a broker can reasonably access is regulation, and it continues to evolve in 2025 and beyond.
The most prominent aspect of this is the use of leverage caps. The maximum leverage that retail traders can enjoy with the FCA in the UK and CySEC in the EU is 30:1 on major currency pairs, 20:1 on minor currency pairs, gold and major stock indices and less than 10:1 on various other commodities and less liquid stock indices. Crypto-linked CFDs are at the bottom of the spectrum in almost all regulated jurisdictions. Australia followed the same trend in 2021, when ASIC reduced the retail leverage from as high as 500:1 to the same level of 30:1 applied in Europe and the UK, stating that it was necessary to ensure that inexperienced retail traders don’t take on too much risk. They are important to the liquidity conversation because they directly impact the amount of capital a broker will have to maintain against its customer’s positions, and ultimately how it sets up its relationship with the liquidity providers and prime brokers.
The rules haven’t stood still. In September 2025, CySEC imposed new restrictions on leverage for a specific group of less liquid CFDs, agricultural products such as wheat, corn and coffee, metals including copper, aluminum and platinum, and a group of regional stock indexes. The changes were made not to represent a dramatic shift, but to make Cyprus’s regulations more in line with the EU. However, there was little reaction from the industry, with senior officials at various liquidity providers calling it a “technical adjustment” and not a structural shift, as the instruments concerned are a small proportion of total CFD trading volume and were popular on the fringes of the retail market. The FCA and the Bank of England have now established a joint task force to strengthen reporting requirements on retail CFD exposure, indicating a growing sense of better co-ordination between conduct regulators and financial stability authorities on the oversight of this market as opposed to a unified approach.
Capital and compensation requirements round out the picture. FCA-registered companies need to have a minimum capital of £730,000, which can exceed this amount depending on the type of their business, keep their clients’ money in tier-1 banking institutions and be members of the Financial Services Compensation Scheme, which guarantees that a firm’s client assets are protected up to a maximum of £85,000 in the event of failure. The compensation ceiling for CySEC-regulated companies under MiFID II is relatively high, but under Cyprus’s Investor Compensation Fund is significantly lower at €20,000 per client. Then there’s best-execution, which every reputable regulator in this space has, and which says that a broker must prove that it is executing the client’s order at the “best reasonably available price” rather than just claim it; this today directly relates to the liquidity question because if a broker claims to have good, competitive liquidity relationships, but can’t prove it, he or she cannot claim to be executing the client’s order at the “best reasonably available price.
Execution Quality: The Metrics That Actually Separate Strong Liquidity From Weak Liquidity
Marketing jargon abounds in this industry, from Tier 1 liquidity to deep institutional pricing, with little to no proof that it’s a winner from a trader’s perspective, and the names are often as misleading as the actual products. What really counts are the metrics that reside in execution data, not a copy of a broker’s homepage.
Last look, arguably the most important and under-discussed, execution practice in this market. In a last-look scenario, a liquidity provider allows a small window of time after the price has been requested to confirm or decline a trade, thus effectively giving itself a last opportunity before putting money at risk. Providers say it’s an essential safeguard against outdated or misleading quotes, and, yes, that’s true. But it also leaves a window open for the provider to turn a trade against the trader in that split second, which presents to the trader as a “no fill” or “requote at a worse price”. That’s why companies such as LMAX and XTX Markets have been adding no last look executions to their selling spiel; a quoted price that cannot be withdrawn after a counterparty has executed is a more meaningful commitment.
Outside of the last look, there are only a few liquidity numbers that really give you insight into a liquidity relationship, one of which is rejection rates the percentage of orders that are rejected and not filled the next is fill ratio what percentage of the volume requested was actually filled; the next is slippage distribution not just the average amount of slippage but how many times and how much, especially during volatile windows; and the final is latency the time between an order is placed and it comes back as a confirmation. Transaction cost analysis (TCA) is the name of this report, and as more of an assertion than a report, it is increasingly demanded by institutional clients and slowly trickling down to more sophisticated brokers for retail clients.
The valuable lesson to be learned here, despite the complexities of the technology, is that a broker who can call its liquidity providers, describe how they execute, and supply actual statistics on how trading is executed is doing something drastically different from a broker that claims to have “bank-grade liquidity” but is not willing to provide evidence. When market conditions are tight, like during fast markets, when key economic indicators are released, or when there’s an unforeseen shock, that distinction is likely to be the deciding factor.
Artificial Intelligence Is Changing How Prices Get Made
While some finance discussions gravitate towards the other side of the industry, namely the trading side, the liquidity side has been an advanced use of applied AI in finance far before most retail talking points. Today, a significant portion of price setting is done by market-making algorithms. In most electronic markets (US equities, forex), they trade algo, somewhere around 70% of trading volume does, and more of the historically voice-brokered and manually-dealt trading will move to automated infrastructure, albeit at a pace that will gradually increase.
The newer changes aren’t just algorithms being present, the newer changes are with the sophistication of the algorithms. Reinforcement learning models are now able to dynamically change quoting behavior in reaction to live inventory risk instead of using rules; meanwhile, natural language processing tools are becoming so fast that they can now dissect news and data releases before they actually move a chart. In fact, non-bank market makers have embraced this trend with pricing systems designed around continually evolving models, rather than more rule-based approaches typical of the last generation of algorithmic trading.
This truly has a real impact on all involved in the liquidity chain. The upside for better-calibrated algorithmic pricing is that it often results in tighter spreads and more consistent pricing even when the markets are moderately active, as the models can handle much more information in a second than any desk ever could. Meanwhile, regulators have begun to focus more and more on just this transition. Those frameworks, which had been limited to algorithm testing and kill-switch controls, are now broadening to what is increasingly being called “decision chain” governance, which exercises a broader lens of scrutiny on the algorithm decision itself, as well as the factors that influenced it, any constraints, and accountability for deployment, especially in the context of new obligations linked to operational resilience and AI-specific supervision that are emerging in various jurisdictions.
This poses a new “due-diligence” question for brokers looking at liquidity partners that didn’t exist five years ago: not only how deep is your liquidity, but how is your pricing actually generated and how do your systems perform during fast-moving markets? It has moved beyond the realm of the technical interest of engineers and has come into the talk.
Consolidation and Margin Compression Are Reshaping Who Survives
But behind the statistics is another, stealthier, more unwelcome story developing in the liquidity provider world: the margins are becoming a lot tighter and the companies that can’t meet the challenge are beginning to walk away.
According to a recent survey of crypto liquidity space networks called Finery Markets, 75% of the firms that have responded to the study experienced noticeable margin compression by 2025, 48% of which said that their margins have significantly deteriorated and only 8% experienced increased profit margins. In the future, approximately 60% of the same group of market participants forecast that the number of active liquidity providers will decrease further through 2026, with a quarter anticipating a decrease and just over a third saying that the number of new liquidity providers will not increase quickly enough to counterbalance the number of liquidity providers that are exiting. The report specifically compares retail forex to the 10-year period between 2011 and 2021, which witnessed a similar round of margin pressure, stricter regulations and the elimination of weaker, undercapitalized brokers, leaving the industry dominated by a smaller number of larger brokers with robust capital reserves.
These are the companies that are doing well through the turbulence. They have invested considerable amounts of money in technology to replace the manual, relationship-driven aspects of the business that simply don’t scale. In the same survey, algorithmic pricing was the No.1 technology investment priority for about a third of the firms heading into 2026, and post-trade automation ranked in the top three for another third, indicating that firms that intend to make it through the next round of consolidation are not thinking of using automation as a way to be efficient, but as a way to stay profitable as spreads narrow.
This is just beyond the liquidity providers. Of course, it is important to remember that in a brokerage that is dependent on a splintered set of external liquidity sources to drive its own pricing, when one of those sources decides to be inactive during a stress event, it is not a pleasant experience to realize that you have a much higher need to diversify your relationship with liquidity sources than you might have thought.
Multi-Asset and Crypto Liquidity: The hottest new market segment
While forex liquidity is a well-established and well-settled market with a long history of sophisticated, well-structured trade, crypto liquidity is more like the adolescent version, which is why it’s become one of the most active liquidity-broker markets today.
The core problem is structural. Forex trades through known relationships and settled systems between inter-banks, while crypto doesn’t have a similar system. Liquidity is spread out in dozens of centralized exchanges, decentralized exchanges, desks on OTC and many blockchains that have different finality and offer different order books and matching engines and settlement procedures. This is exactly why prime brokers and liquidity aggregators that specialize in cryptocurrencies are not just a valued commodity for a broker, but are a must-have.
To adapt to the 24/7, on-chain nature of this industry, the response has been to import the same aggregation logic used in mature FX and reconstruct it. The use of cross-venue smart order routing, cross-margining, wherein the same pool of collateral can back positions across all platforms, and multi-party computation security with qualified custody partners are all gone from the fringes and into the mainstream of serious crypto prime brokers. That’s not to say that regulatory scaffolding is catching up, either, because new laws such as the EU’s MiCA regulation and the US GENIUS Act are beginning to provide stablecoins and tokenized assets with legal support, while many of the traditional institutional managers list operational complexity as their primary hurdle for complete participation.
The bottom line for brokers is that the multi-asset liquidity providers who now provide forex, indices, commodities, equities and crypto margin accounts and connections are much more valuable than single-asset specialists. The reason why so many of the aggregators mentioned above in this piece have aggressively pushed themselves into multi-asset coverage in the last few years is that it makes their operations of running a modern, diversified brokerage more convenient and reduces the counterparty risk involved.
The Difference Between a Strong and a Weak Liquidity Partner
But after all the complexities, the question that most people really want answers to is much simpler: how to distinguish between a good liquidity relationship and a mediocre one, given the confident marketing language?
The starting point is regulatory status but, don’t overlook the logo at the bottom of the page. The difference between a firm regulated by FCA or CySEC or ASIC and only an offshore firm is the fact that the first ones must adhere to real capital requirements, segregation rules, best execution obligations and more, whereas the latter does not always have to.The difference between an offshore firm and a firm regulated by the FCA, CySEC, or ASIC is that the latter must adhere to real capital requirements, segregation rules, and best execution obligations, whereas the latter may not always have to. It’s also good to see if a broker has several different licenses in various jurisdictions, something that is common among larger, established brokerages, and typically indicates a level of scale and scrutiny that multiple licenses would not.
But in stressful times, depth is more important than in normal days and nobody can fake that. When there’s nothing going on, almost all of the liquidity sources are deep and tight. The true measure of the liquidity will be seen around major economic data releases, central bank decisions or any unexpected geopolitical events when liquidity becomes thin and it costs traders something tangible in terms of slippage and rejected orders. If the broker or liquidity provider can actually tell you something about how his systems would work the next time markets really get bad, and doesn’t avoid the answer, he’s telling you something.
Another key indicator is transparency with regard to the implementation model itself. A firm that is willing to be clear on whether it runs on an STP or a market-making basis or whether it operates a disclosed hybrid is likely to be quite different than one that relies on a term such as “institutional-grade liquidity” which they don’t bother to define. Liquidators will be happy to share the same statistics with you, particularly facts like execution statistics, fill ratio, average slippage, and rejection rate these are numbers that bolster the pitch, not detract from it.
Last but by no means least, there is technology and coverage flexibility that is more important than ever. FIX API access, the ability to support standard bridge technology, the platforms a broker actually wants to operate on, and the ability to support the platforms that a broker actually wants to operate on and the full extent of multi-asset (cross-platform) coverage all lower the operational risk of being locked into one single rigid relationship. A liquidity partner that will grow with your brokerage, not require a painful migration once you’ve reached a certain volume and is willing to do so over many years, is more valuable than one that can do a little better if it doesn’t grow with you.
Warning Signs Worth Taking Seriously
There are a small number of patterns that are repeated in numerous circumstances surrounding less robust liquidity relationships that should be named explicitly instead of euphemistically.
One of the most obvious indicators of a broker that’s not transparent is if they refuse to disclose their liquidity providers, even in a general sense. A good broker should be able to talk about where they get their pricing from because it is not something that detracts from them it’s a selling point. When such terms are vague, unfalsifiable and no names are given, no regulatory detail, no hesitation to go any further if pressed, the whole thing is to be taken with a pinch of salt especially if it is the main thrust of a firm’s marketing rather than a small accessory at the end of the page.
The spread of behaviour also has its own story in the case of major news events. In any release, particularly one of great impact, the spreads will widen a bit for every broker; it is an industry norm and is no exception to great firms with excellent underlying liquidity. The issue of watch is spread widening which seems like a great deal more than the market conditions, with a tendency to requote or reject orders at exactly the times that a trade would have been profitable. Either that’s a genuine underliquidity, or that’s a last look method that’s not really a form of risk control at all, but merely a filter that only ever benefits the provider.
The list of patterns to be guarded against is complete with no negative balance protection, no compensation scheme, or just a single offshore license without Tier 1 or Tier 2 regulatory support. There is simply less buffer between the trader and a truly bad outcome while these things don’t automatically mean a firm is operating in bad faith; many offshore-brokerages are operating fairly and have less stringent capital requirements, investor protection and less scrutiny given to how they execute trades. We’ve covered exactly this pattern before in our review of TraderUR, an unregulated broker that showed several of these same red flags in practice.
The lessons of history are a harsh reminder of why all this is important. The Swiss National Bank’s decision in January 2015 to abolish its cap on the Swiss franc’s value against the euro was not just a withdrawal of liquidity, it was a complete lack of liquidity for several crucial minutes, as big names such as UBS and Credit Suisse shifted their quotes in tandem, leaving a gap of several hundred pips between the last traded level and the next. Several retail brokers came close to insolvency in one day, not because their business model is bogus, but the liquidity that they’ve relied on is not as deep when things go wrong as it seemed when things were going right for years. It is still one of the most obvious examples in recent market history of the importance of the fundamentals in a liquidity relationship, rather than its appearance on an average Tuesday afternoon.
The direction of Liquidity Markets going next
Some of the directions appear obvious enough to call out directly, with the caveats about predicting a market this dynamic aside.
The trend of consolidation among liquidity providers is likely to persist, not only in the crypto market, but in the entire industry, as margin compression continues to favor larger, technologically advanced LPs over smaller, more relationship-focused ones. The companies that are most likely to gain are those that are already using algorithmic pricing and automated post-trade processing as an integral part of their business, not something they are planning on using someday.
Multi-asset bundling will continue to grow as well. The general direction that the Prime of Prime firms and aggregators have gone in the past is towards offering forex, commodities, indices, equities and crypto in one connection instead of specializing in a few areas, so there’s little reason to think that will change now, especially since it’s much easier for brokers to get counterparty-risk and operational value out of consolidating asset relationships than it is to generate those same values by distributing them across a dozen different connections.
The convergence of the regulations is likely to persist, with additional layers of AI-based governance added to current algorithmic trading regulations being adopted by the FCA, CySEC, and ASIC and additional control measures to come into effect around leverage caps, capital requirements and best execution standards. Companies who establish real transparency and explainability in their pricing process early on will be more likely to experience less disruption than companies who attempt to add this component after the regulatory pressure.
And, as geographically, the center of gravity continues to move slowly eastward. Singapore hitting the trillion-dollar dollar mark in daily trading is more than a curiosity; it fits into a larger trend of institutional trading moving to Asia to directly cover trading hours, rather than automatically going the London/US route. For the moment, none of it draws the UK out of the world leader with respect to the manufacturing of liquidity, but it does indicate that the world’s geography of liquidity is becoming more diffuse in the West than it has been for most of the market’s history.
Bringing It All Together
You don’t need to know a bunch of terms inside and out to be a liquidity broker. It’s about learning that each and every price on every trading screen is the result of a truly complex system, one that is composed of capital, technology, regulation, risk appetite and all these layers are stacked on one another in a way that most participants fail to consider. What’s driving the $9.6 trillion moving through this system every day, the steady strengthening of the regulatory net across the FCA, CySEC and ASIC, and the steady consolidation of weaker players is the opposite of a lessening of liquidity provision it’s an increase. If you’re more focused on strategy than infrastructure, our guide to crypto trading strategies is a natural next read.
The questions remain the same whether you’re looking to develop your brokerage business and select the best liquidity partners to access, or just want to know what makes a broker’s execution tick. Who’s doing what when it comes to providing this liquidity? How deep does it run when markets are tough, compared to a ‘normal’ calm day? How open is the firm to revealing the answer? If you persist in asking those three questions, and then checking and checking, you can find out most of what there is to know.
