The expansion of global money markets has challenged the traditional dominance of commercial banks and major businesses in forex, cryptocurrency, and other financial sectors.
Digital innovation and online platforms have opened new opportunities for small and medium-sized enterprises. However, starting a brokerage business requires reliable liquidity. This article covers various liquidity sources, prime liquidity firms, non-bank liquidity providers, and identifying reputable providers.
How To Manage Liquidity In FX And Crypto Market
Emerging retail brokers need to secure liquidity to enter cryptocurrency or FX markets. To avoid initial expenses, they should partner with liquidity suppliers and prime brokers or PoP companies to manage liquidity, allowing them to match competitive pricing and spread margins in unpredictable markets.
LPs are individuals or institutions that act as market makers in an asset class, operating as both buyers and sellers. They are crucial in the equities space, as many stock exchanges rely on them to ensure price stability and improve liquidity.
These providers also oversee important services and take on significant risks but still profit from the spread or positioning themselves based on valuable information. They also provide interbank market access to retail brokers, typically large multinational investment banks or non-bank entities.
Liquidity suppliers stream executable rates to the broker, whose aggregator engine selects the best bid/ask and delivers the best possible spread. Brokers are the direct counterparty to all trades executed with the LPs, but some send all their flow to them. LPs' suitability and reliability are determined by characteristics such as order rejection rates, spreads, and latency.
Types Of LPs
Brokerage firms can choose between Tier-1, Tier-2, and Prime of Prime LPs.
Tier-1 LPs offer a wide range of services at high prices. These are the largest and most reputable LPs in the FX market, offering deep liquidity for buying and selling large volumes of currencies without significantly impacting the market, ensuring traders receive the best prices and execution speeds.
Tier-2 suppliers are smaller than T1 banks. Nevertheless, they play a crucial role in the market, offering liquidity to smaller brokers and finance entities while offering competitive prices and execution speeds despite not providing as much deep liquidity.
Prime of Prime LPs, a middle-ground option, balances service quality and pricing by offering extensive currency choices and services at affordable prices. They work with other finance institutions and prime brokers to offer a variety of asset classes and currency pairs.
What To Look For In A Reliable LP
LPs offer several benefits to businesses, including predictable operating costs, facilitated growth, pricing stability, and efficient risk management. By establishing a connection with an LP, businesses can project their operating costs accurately, reducing reliance on institutional loans with variable interest rates.
They also facilitate growth by providing scalable liquidity services, allowing brokerages to access larger capital pools and adapt to rising trade volumes.
Additionally, liquidity suppliers ensure brokers have access to the latest order books, allowing them to manage risk and maintain competitiveness. The ability to manage liquidity is crucial for a brokerage's ability to provide stable pricing, control risk, and sustainably expand.
Selecting a suitable liquidity partner is crucial for a brokerage's success and expansion. Key factors include transparency in pricing and reputation, security and technology, and operational scale.
Ensure the liquidity partner's pricing structure aligns with your financial strategy and cost schedule. Prioritise security with cutting-edge solutions and modern digital tools. Determine your brokerage's objectives and business model to match the liquidity partner's services.
Why Choose Prime of Prime LPs
Prime of Prime (PoPs) is a trading platform that breaks down tier-1 resources into smaller, manageable chunks, allowing smaller and mid-sized brokerages to access high-tier liquidity services at a lower cost.
PoPs offer a $100,000 monthly service from a tier-1 provider in smaller pieces to several clients at a cost of $15,000. This strategy allows tier-1 firms to earn significant returns while small to mid-sized brokerages benefit from tier-1 services at a lower cost.
Final Thoughts
Brokerage businesses, particularly startups, require a reliable liquidity partner, with PoP providers often offering unique benefits that other providers may not offer.
