You’ve made the decision to launch a brokerage. Maybe you have thought about what you want to offer, possibly some brand names, where you want to operate from, and some innovative features to give your business a strong USP. You might have selected which trading platforms you will offer, or you are still investigating, but the one area that needs special consideration is liquidity. Liquidity is the lifeblood of any brokerage and without it, even if you have the best site, great service, and thousands of new traders ready and lined up, it will be tough to achieve success. Let’s take a look at some key concepts related to liquidity and then we can explore why choosing the right liquidity provider can mean the difference between success and failure. While this article focuses on new brokerages, the information is just as relevant to existing brokerages.

In the strictest definition, liquidity describes how easily an asset can be converted to cash or a cash equivalent. In the world of forex trading, CFDs, or even cryptocurrencies, liquidity is created by the level of activity in the market. The more market participants trading, the more liquidity that is created. When there is liquidity in the market, trades can be executed because sellers are willing to sell their assets and there are buyers available to buy what the sellers are offering. Let us take a look at an example. Let’s assume Joe wants to sell apples on the open market. However, there are very few buyers wanting apples, so Joe is forced to wait until someone comes along and makes an offer and he may even have to discount the apples to attract more potential buyers. As you can deduce, this is not an optimal scenario as Joe wants to sell right now and he may not have the luxury of waiting till a buyer comes along, or by discounting the apples, he may make a loss. In other words, there is very low liquidity in the market as Joe cannot convert his apples to cash very easily at a reasonable price. Bearing this in mind, it is easy to see how when there is not sufficient liquidity in the market it can delay trades taking place and the price, whether it be on the demand or supply side, plus there are other factors which we will look at now.

Volatility refers to the variation of trading prices over a period of time. While a level of volatility is vital because it provides lucrative opportunities, when extreme price fluctuations take place i.e., high volatility, it results in choppy price movements and increased risk.With that said, you can start to see the relationship between liquidity and volatility. In other words, when there is low liquidity, there is generally high market volatility. On the other side of the coin, when there is high liquidity, it results in more stable prices and reduced risk.

Trading volume refers to the number of buyers and sellers. A key indicator for traders is the trading volume. As you can deduce based on this, liquidity, volatility, and trading volumes go hand in hand. Therefore, an increase in trading volume increases the liquidity.

Taking the above concepts into consideration, as a broker, you want your traders to be able to buy and sell quickly and easily. Traders need to know that when they place an order, it will be executed quickly at the desired price, and they will not be stuck waiting for the right conditions. It is important to note that high liquidity does not necessarily result in higher prices, it simply means trades can take place quicker and easier, which drives down the spread, and minimizes requotes and slippage, especially during high impact events. Another reason why liquidity is so important is it allows for large orders to be executed as there are sufficient market participants. High liquidity also enables traders to perform more accurate technical analysis because the historical price action is more consistent with fewer extremes or erratic price swings.

By now it should be clear why liquidity is so important for a brokerage, but now the big challenge is choosing the right liquidity provider or providers for your brokerage. A factor to bear in mind is the products you offer because your forex liquidity requirements may be different from what you need for crypto. Here are some of the key considerations to choosing the right liquidity provider.

Instruments – Having a wide range of instruments for your traders is essential. Your liquidity provider should offer a large number of instruments across all major asset classes including cryptocurrencies.

Market Depth – The greater the number of buy and sell orders at different price levels, the greater the depth of the market. This is an excellent indicator of the liquidity for a particular asset class.

Speed of Execution – Vital for the success of a brokerage is for orders to be executed quickly without delays which minimizes requotes and slippage. This is especially important during high-impact events that trigger large trading volumes.

Competitive Pricing – Trader profitability is affected by the spread, commissions, and swaps, so in order for your brokerage to be competitive, the liquidity provider must offer the most competitive pricing.

Accurate, Real-Time Price Feeds – Crucial for traders is the pricing data. It is essential that the price feeds are extremely accurate and updated in real-time. Lags in data can be highly detrimental both for the trader and the brokerage.

FIX Protocol – The liquidity provider must offer a FIX protocol connection as well as flexible APIs that allow for integration into the trading platforms you provide your clients.

Historical Data – For your traders to perform effective technical analysis, they will need accurate historical data. The liquidity provider should have a substantial amount of historical data that is easily accessible.

Regulation – The ideal liquidity partner should be regulated with a reputable regulatory body. This ensures they are following best practices and also provides you with a level of assurance.

Reporting – Detailed and accurate reporting is essential for managing your brokerage effectively. Therefore, an area that you should pay extra attention to is the reporting offered by the liquidity provider.

Proftit is a B2B brokerage solutions provider that has helped hundreds of brokers, new and old. Proftit’s flagship product is a purpose-built management and CRM for brokers. The technology provides a unified platform and interface for managing your entire business, including marketing, sales, call center management, support, reporting, and much more. Proftit also provides comprehensive consulting, project management, and support services to help new brokerages get up and running, as well as enhance and optimize existing businesses. Proftit boasts an extensive global network of partners including reliable and reputable liquidity providers. Contact Proftit today to learn more about their brokerage technology and solutions.