Liquidity bridge and margin engine solutions are critical elements of any brokerage, as are liquidity providers (LPs).
Today, we will talk about all the ways retail brokerages can optimise their collaboration with liquidity providers to reach the best pricing, protect themselves against unwanted risks, and streamline the workflow.
As a vendor with over 100 trusted liquidity provider partners, Tools for Brokers champions utilising different strategies and tools to achieve success.
Backup LP for when something goes wrong
For starters, brokers who only choose to work with one or two liquidity providers may miss out on better pricing, faster execution, and put themselves in a risky situation overall. What if the only partner you work with goes down? The reputational and financial loss can be detrimental, even if the outage only lasts a few minutes.
In the Trade Processor liquidity bridge, this particular issue is handled through the Backup LP functionality. The logic is simple – if the primary LP goes down for whatever reason, the system automatically routes orders to the backup liquidity provider. That way, there’s no downtime, traders still have their orders successfully executed, and all is well. Once the primary LP is back up, brokers can choose to revert to them or stay with the second option.
At TFB, we are constantly on the lookout for new, reliable liquidity providers to partner with. Right now, we work with a wide range of LPs, including LMAX, Finalto, and Match-Prime, plus more than 100 other LPs.
Exposure balancing between liquidity providers
In the Trade Processor liquidity bridge, there is an option to balance exposure between different LPs.
Should exposure on one of the LPs reach its limit, it can be balanced out by moving to a different LP using the Volume Transfer tool in the Trade Processor.
Private aggregation pools
Staying in control of your execution manifests differently. One of the ways to gain full control is through building pools of partners you trust and align with.
Create private aggregation pools by grouping liquidity providers based on your needs, business model, and current preferences. The pool you create will define what liquidity the incoming orders will be sent to and how the execution results will be processed.
Tip: To manage an aggregation pool in Trade Processor, go to the Aggregation tab to merge or separate liquidity providers.
Aggregation modes for smarter execution
Working with multiple aggregation modes means flexibility with order execution, lower risks, and better pricing at the end.
In Trade Processor, for instance, there are 6 types of aggregation modes that brokers can choose from that enable the system to reach a <1 ms execution speed.
Each mode of aggregation tackles different issues, whether it’s over-exposure, potential discrepancies due to best price aggregation, or execution of a low-liquidity instrument order.
Tip: Brokers don’t have to use each and every aggregation mode available, but can apply them for specific clients and cases to maximise volume flow, execution quality, and minimise latency and slippages.
Executing micro lots below the liquidity provider’s minimum
Whether it’s brokers willing to offer micro lots to attract a new target audience or differentiate themselves from the competition, or traders willing to buy ultra-small quantities of an instrument, executing micro lots is a challenge.
Most liquidity providers have minimum thresholds in place to ensure they’re not overwhelmed with micro orders and wasting too many resources on low volumes.
This doesn’t have to stop brokers from dealing with smaller-scale orders. The Volume Converter functionality within Trade Processor accumulates micro volumes from several orders and sends them off to liquidity as a single order once it reaches the threshold.
Smart large volume order execution for the best pricing
It’s not only the micro and mini orders that cause a stir. Large volumes also represent certain risks in terms of best pricing and execution time.
With a large order placed on liquidity, the basic way to execute it would be to wipe out all liquidity available for the requested instrument. This would be quicker, but the end pricing will not be the most satisfactory.
If you’re working with Trade Processor, you can set it up to break large volume orders into smaller parts, so they’re executed over time with more preferable pricing. Once the last part of the order is completed, the system then consolidates all the elements back together and completes the big order execution. This method takes a bit more time, but it ensures the pricing is favourable for both the broker and the trader.
Final thoughts
Working with reliable liquidity providers is half of a broker’s success, but a lot depends on the technology the brokerage utilises to make the most of each and every operation and order execution. Small tweaks to the bridge settings, a minor change in the strategy, and all of a sudden you’re achieving far better results than you could have ever imagined.
Whatever solutions you have in place, it is worth revisiting them every once in a while to inspect and optimise the execution workflow. If you are a Tools for Brokers client, reach out to your account manager or email us at sales@t4b.com to find out if you’re missing out on functionality that’s already available that will be a game changer, or to cross-check the setup and look at additional tools to expand your services selection.
