After the debt ceiling agreement in May 2023, liquidity in the US financial markets dropped sharply, shaking the confidence of investors worldwide. Even Bitcoin’s liquidity took a hit, worse than the aftermath of the FTX collapse. Such conditions can deter experienced traders, impacting brokerage revenues. However, considering retail traders hold nearly $1.8 trillion from the panic sell-off in 2022 and with diminishing economic fears, individual trading and hedging are anticipated to drive the markets in 2023. Moonfare’s study suggests that amidst this instability, defensive strategies will shape trading decisions, pushing investors to hedge and diversify portfolios for profitability and risk management.
Tighter spreads and customer retention
Engaging in financial markets comes with inherent risks, heightened by potential slippage from low liquidity. Low liquidity can also widen spreads, particularly impacting traders of exotic forex pairs. Often, consistent liquidity with minimal forex spreads is primarily available to institutional investors. For retail traders, low spreads are usually accessible during overlaps of major forex sessions.
Market dynamics, sudden news, or economic shifts can cause price gapping in less liquid currencies, potentially dampening client enthusiasm. OTC markets vary in bid-ask rates, with slippage disturbing strategies.
Ultra-narrow spreads are beneficial for cost-effective hedging and minimizing potential losses. They also mitigate the risk of margin calls and can entice clients to seize more market opportunities, boosting brokerage revenues.
More experienced market participants often prefer variable forex spreads, which can sometimes be tighter than fixed ones. With the tightest spreads, some traders might feel more comfortable using algorithmic and robo trading. Without the ability to offer the tightest spreads, a brokerage might miss out on clients who rely on fast-paced strategies. Providing bespoke spreads across a wide range of financial instruments can give your brokerage an edge over the competition. Additionally, it disseminates the message that you have access to deep liquidity, which in turn helps improve customer acquisition.
Reducing slippage – The role of a professional liquidity provider
Experiencing slippage issues? They can lead to lower profits and bigger losses. Luckily, professional liquidity providers wield a toolkit designed to tackle these challenges:
Deep Order Book available via FIX 4.3 or FIX 4.4: Thanks to FIX 4.3/4.4 integrations that allow full order book presentation, these providers ensure exact information about market conditions. This feature allows clients to assess the performance of each LP. Clients are able to choose the provided with deepest order books and most effective execution. What does it mean for you? A reduced risk of slippage and smoother trading experience.
Order Book-Based Execution: No more limitations due to time priority order execution. By executing orders based on a full view of the order book, you can gain greater precision and better fills, effectively curbing slippage and optimizing your trades.
Full Post-Trade Reporting: In-depth reporting for a better understanding of your trade executions. Spot slippage patterns and devise strategies to reduce them. Your trading just became a lot more transparent and efficient.
Ultra-Fast Price Feeds: Access the most accurate, current market data thanks to ultra-fast price feeds sourced directly from exchanges and top-tier banks. Minimize discrepancies that could lead to slippage and make more informed decisions faster.
Servers: It is highly important to have servers hosted in top-tier data centres worldwide. You can trust in the reliability and speed of your operations, regardless of where you are. These centres offer reduced latency for faster transactions and robust security measures for reliable uptime. So, whether you’re trading from London to Hong Kong, you’re assured of fast and efficient execution. Our recommendations: Equinix and Digital Reality.
Maximum order size and maximum NOP (Net Open Position).
Two additional aspects that brokers should consider when selecting a Liquidity Provider (LP) are NOP Limits and Maximum Order Size.
NOP Limits are vital for brokers who hedge their net exposures. They must be aware of these limits on the LP side; otherwise, some orders might be rejected and the additional exposure might not be accepted. Every LP maintains different policies regarding NOP, so it’s advisable for brokers to consult with their LP on this matter before signing any agreement.
The second point is maximum order size. Liquidity providers should not artificially limit the maximum order sizes. The maximum order size should always be the result of the available tickets in the order book. It allows the clients to effectively hedge their exposures.
TRUST
Trust, although less quantifiable, plays a crucial role, particularly in contentious situations. In any business, unclear situations arise that require goodwill from one party to settle claims. Working with an LP where the broker personally knows the decision-makers can simplify problem-solving compared to larger, structured organizations with strict procedures and policies. Personal connections can often expedite resolutions in these scenarios.
Final Thoughts
X Open Hub is a liquidity provider for over 5,000+ instruments, including 2,000+ stocks and ETFs on 16 major exchanges across the world, 60+ currency pairs, 20+ cryptocurrencies on 9 exchanges, 20+ indices and the most popular commodities. We are proud to have forged and sustained 100+ partnerships across more than 20 countries. Capitalise on our global network to maximise liquidity and enhance your product offerings. When you partner with X Open Hub, you can offer customers the best possible market depth, execution speeds and pricing with
ultra-tight spreads. Read more.
Partnering with an experienced global liquidity partner is essential. Leveraging the expertise and experience of a trusted partner can allow you to focus more on value-added service provision, such as improving the customer experience and providing financial education to empower your clients.