Earlier this week, we hosted a webinar on multi-liquidity for Forex and retail brokers.
Today, we’re providing a summary of the webinar with the key takeaways.
What is liquidity in Forex?
In Forex, liquidity refers to the ease or complexity of buying and selling a currency pair.
It’s like water in a swimming pool. The more water you have, the smoother the flow.
Currency pairs that are more liquid are traded with little change to pricing, i.e., they are highly liquid. This, in turn, means tighter spreads, lower slippage, and faster execution. A great example of a highly liquid currency pair is EUR/USD, as it’s always traded in very high volumes.
If a currency pair is not very liquid, it will be sold or bought with wider spreads, higher slippages, and more notable price volatility.
How liquid a currency pair is has a direct impact on the execution quality, for instance, how fast the order is executed, how good the price is for the trader, and the amount of commission for the broker.
To boost the execution process and increase liquidity across different currency pairs, some brokers choose to work with several different Liquidity Providers (LPs), while others stick to the tried-and-tested LP partner they’ve worked with for a long time.
Single vs multi-liquidity: Which one’s better?
There’s no 100% consensus in the brokerage world on what’s better – working with a single liquidity provider or many of them. There are pros and cons to both, so let’s first look at what each of them offers.
As you can see, sticking to a single provider, while convenient, leaves you at a significant disadvantage. Many brokers who start working with only one LP initially, eventually move to a multi-LP format to enjoy all the benefits and reduce their operational and reputational risks.
Side note: Usually moving to the multi-LP format is an upgrade, and not a necessity for brokers. However, depending on the jurisdiction where you’re registered, the regulator might require you to work with at least two LP partners to stay compliant.
Is multi-liquidity really that great?
There are seemingly mostly benefits to switching to a multi-LP business model. But is this really true? Let’s have a closer look at the pros and cons.
The advantages of being a multi-LP broker include:
- Tighter spreads
- Reduced slippage
- More stable execution
- Diversification
The possible downsides of a multi-LP approach are:
- Enduring higher costs
- Making daily management more complex
When Do Brokers Need Multi-Liquidity?
Okay, so a multi-LP approach is good for brokers, but when is the best time to move from one LP to several?
Here are a few prerequisites for making the transition:
- The broker has a consistently high trading volume.
- Complaints about slippage and execution speed are raised periodically.
- The broker is offering multiple asset classes (such as Forex, indices, commodities, or crypto).
- The broker is using both A-Book and B-Book models.
- The company is expanding into new markets with different liquidity needs.
Any of the points above represents a challenge and an opportunity, and they are often accompanied by execution issues. Moving to several LPs is often the most efficient solution for minimising and eliminating business risks while also maximising the potential of the broker’s generated volumes.
Tip: Multi-LP is not a must, but it’s a super efficient and relatively low-barrier instrument for continuous and sustainable scaling.
How to implement multi-liquidity in your brokerage
If you’re convinced that multi-LP is the way to go, here are a few tips for making it work with the least disruption.
- Choose the right LPs. Look for competitive spreads, reliability, and regulation.
- Select a reliable and robust bridge provider. The liquidity bridge needs to aggregate multiple LPs and have advanced aggregation and execution tools available to accommodate different trader scenarios.
- Set up order routing rules. Direct trades based on conditions (e.g., volume and asset type).
- Manage costs effectively. Reduce overhead by optimising the LP mix.
A common objection to switching to multi-LP operations is the additional complexity. A good bridge provider will simplify multi-LP execution and minimise the extra effort a broker must put into managing the workflow.
Tip: It’s not enough to set your multi-liquidity environment once and forget about it. Brokers should review their LP partners and strategy at least once every six months to ensure they’re being the most efficient and not missing out on opportunities and volumes.
Common challenges with multi-LP and solutions for them
Working with multiple liquidity providers is a great business strategy, but it isn’t without its challenges.
Challenge: High cost of multiple LPs
Solution: Use an aggregator and optimise routing
Challenge: Execution delays and technical complexity
Solution: Choose a reliable bridge and monitor the execution
Challenge: Regulatory compliance
Solution: Ensure LPs are regulated and transparent
One of the common concerns brokers have when moving to a multi-LP setup is the fear of losing control over pricing and execution.
However, with the right aggregation technology, brokers can efficiently manage liquidity, optimise spreads, and reduce slippage. Another fear is increased operational complexity, but advanced platforms simplify the process by centralising LP connections and automating key tasks.
Additionally, brokers may worry about higher costs, though better pricing and deeper liquidity often improve profitability. Ultimately, transitioning to multi-LP enhances risk management, price transparency, and flexibility, creating a more competitive and sustainable trading environment.
Final thoughts on multi-liquidity for Forex brokers
Any change to an existing business process comes with its benefits and complexities. In terms of working with multiple liquidity providers, the temporary difficulties a broker might face are easily outweighed by the advantages and the growth that they get in return.
Having more LPs in your arsenal means more flexibility, less downtime and execution delays, and better pricing options for traders.
Finding the right solutions to support and enhance multi-LP operations is half of the success. If you’re unsure how to proceed or would like to explore your options, reach out to us, and we’ll happily talk you through any questions or concerns you might have about working with multiple liquidity providers. Email us at sales@t4b.com or reach out to your account manager directly if you’re already a client of TFB.
