(+) Liquidity Providers

Major Liquidity Providers and Forex Brokers

Liquidity providers (LPs) are financial entities that offer retail brokers the necessary bids/asks for their clients’ orders. This is happening by acting at both ends of currency transactions. In the Forex market, the top liquidity providers are called Tier-1 providers and traditionally offer the most competitive spreads.

Forex brokers that connect with quality liquidity providers can offer their clients a trading environment without high slippage and re-quotes. This is why liquidity providers play an important role in the process of currency trading.

 

Two Categories of Liquidity Providers and Forex Brokers

Generally, in the Foreign Exchange market, there are two levels of liquidity providers: Tier-1 and Tier-2.

(1) Tier-1

Tier-1 liquidity providers offer direct access to the Foreign Exchange market liquidity. All Tier-1 liquidity providers are bridged through the Electronic Communication Network or the ECN.

• This category mainly includes international banks such as UBS, Deutsche Bank, and Barclays
• However, there are also other Tier-1 liquidity providers, such as the financial exchanges CME, CBOE, LIFFE, and ICE
• Some large hedge funds, brokers, and investment firms can also be classified as Tier-1 liquidity providers

Tier-1 Liquidity and Forex Brokers:

• ECN Forex brokers are those brokers that can directly trade Tier-1 liquidity
• DMA Forex brokers are those brokers that can directly connect to a large Tier-1 liquidity provider

(2) Tier-2

Tier-2 liquidity providers act as middlemen between the Tier-1 liquidity and brokers.

• Key Tier-2 liquidity providers in the Foreign Exchange market include firms such as CurreneX, FXCM Pro, LMAX, and Swissquote

Tier-2 Liquidity and Forex Brokers:

Forex brokers that do not generate large enough volumes to connect with Tier-1 providers, connect with Tier-2 liquidity providers.

• STP Forex Brokers are brokers that access Tier-2 liquidity

STP stands for Straight Through Processing, while ECN stands for Electronic Communications Network. The transactions of ECN/STP Forex brokers are executed directly to a Tier-1 or a Tier-2 liquidity provider.

 

 

Market Makers

Brokers who cannot access Tier-1/2 liquidity are categorized as Market Makers or else Forex agents. These firms operate through a dealing desk (DD) and create their own market within the real market. These firms are often accused of having a conflict of interest with their customers. The reason is that they are forced to take the opposite side of their customers’ positions. Market makers offer a trading environment of wide trading spreads and high slippage on order execution.

• Market makers have no access to Tier-1/Tier-2 liquidity

 

Prime of Prime (PoP) Brokers

A Prime of Prime firm provides a retail broker with access to the trading liquidity pool of the largest banks.

• A Prime of Prime (PoP) broker can access the Tier-1 bank's liquidity
• Prime of Prime (PoP) brokers are classified as Tier-2 brokerage firms
• PoP brokers offer higher capital leverage to their clients and allow them to trade smaller sizes (compared to when trading directly with a Tier-1 bank)

 

Bridges with LPs

A Forex broker will usually connect with more than one liquidity provider, in order to take advantage of the best quotes obtainable from several liquidity sources. This is happening by establishing an electronic bridge that automatically connects the broker’s own trading platform with a third-party trading platform that acts as an ECN. The Forex broker can create different groups of clients, and choose which group orders will be processed by the ECN, and which group orders will be filled by an internal book.

This is a list of some of the key liquidity providers worldwide (per region).

Table: Liquidity Providers

United States	Morgan Stanley	CME Group	CBOE	Citi Group	Equinix	JPMorgan	CurreneX
	Merrill Lynch	Goldman Sachs	Bank of America	Nasdaq	Tradepoint Systems	FXSpotStream	EasyFX
	ICE	NYSE	FXDD	Nadex	TradAir	GAIN Capital	BNY Mellon
	Jefferies	Spotex	Global Trading Systems	Calypso Technology	Forexware
United Kingdom	UK Clearing House	Barclays Capital	TP ICAP	Make Capital	IXO Prime	Finalto	LMAX
	iS Prime	Refinitiv	CMC Markets	CrescoFX	DMALINK	Rayfin Solutions	CrescoFX
	Quod Financial	FXCM Pro	Sucden Financial	GMEX GROUP	Standard Chartered	FX Connect
	Tickmill Prime	XTX Markets	LSE
Europe	Deutsche Bank	Euronext	Flow Traders	ABN AMRO	Luxembourg Stock Exchange	Societe Generale	BNP Paribas
	TopFx
Switzerland	Credit Suisse	UBS	Swissquote	BierbaumPro	SIX Swiss Exchange
Hong Kong	HSBC	Global eSolutions	Hong Kong Stock Exchange(HKEX)	m-FINANCE
Japan	MUFG	Nomura	Tokyo Stock Exchange(TSE)	Mizuho Bank
Singapore	Saxo Group	Spark Systems	Singapore Exchange
Australia	The National Australia Bank (NAB)	BAXTER-FX	ACY Securities	26 Degrees
Canada	TickTrade	CIBC	RBC Capital Markets

 

The Importance of Liquidity and Most Liquid Forex Pairs

Liquidity is necessary in any financial market. A liquid market makes quotations more competitive and facilitates transaction flows.

A low level of liquidity means:

• Wide trading spreads
• Increased market risks
• Sharp fluctuations in pricing when large orders are executed
• Institutional investors are not willing to enter

An easy way to understand the role of liquidity in the Foreign Exchange market is by comparing the quotation of a major pair (i.e. GBPUSD) with an exotic pair (i.e. USDTRY). The trading spread of the exotic pair will be multiple times more expensive than the spread of the major pair.

 

 

The Most Liquid Forex Pairs

The king of liquidity in the Foreign Exchange market is the Euro against the US Dollar (EUR/USD).

• The trading spreads of the pair can be as low as 0.2 pips

The second most liquid Forex pair is the US Dollar against the Japanese Yen (USD/JPY).

• The trading spreads of the pair can be as low as 0.4 pips

The third most liquid Forex pair is the British pound sterling against the US Dollar (GBP/USD).

• The trading spreads of the pair can be as low as 0.5 pips

Other liquid Forex pairs include the US Dollar against the Swiss Franc (USD/CHF), and the Australian Dollar against the US Dollar (AUD/USD).

 

Interesting Links: https://liquidityfinder.com/providers/type/broker

 

■ Liquidity Providers and Forex Brokers

ForexExperts.net