When it comes to a brokerage, a liquidity bridge is, arguably, the most crucial element of the workflow. It’s the middleman between a liquidity provider and a broker, and the success of order execution depends on how robust, reliable, and secure the bridge is.
Today, we’re going to uncover what a modern liquidity bridge entails, talk about why it’s essential for both brokers and traders, define key characteristics of the most successful bridges, and discuss the top risks and challenges that a broker can face with this software.
What is a liquidity bridge?
A liquidity bridge (also sometimes referred to as a liquidity gateway and an execution engine) is a technology solution that is used by retail brokers, hedge funds, and prop firms to power order execution in the financial market.
While many factors contribute to smooth trading and order execution, a liquidity bridge has a disproportionate influence on the overall ease and efficiency of the workflow.
Why is the liquidity bridge important in the trading process?
Liquidity bridges connect brokers with global liquidity providers and liquidity pools, helping brokerages trade and execute orders with the best outcomes possible.
However, it’s wrong to assume that a liquidity bridge is simply an intermediary necessary to get from point A to point B.
The robust liquidity bridge helps:
- Get the best available pricing
- Minimise delays
- Automate order routing
- Reduce latency and slippage
Overall, bridges elevate operations and workflows, achieve better control over commissions, and limit exposure to various risks. They ensure consistency and predictability – two critical factors in a highly intense and failure-intolerant industry.
And it’s not just the broker that benefits from advanced and modern liquidity bridges.
Traders also enjoy a range of benefits, including:
- Real-time market quotes
- Faster order execution
- Reduced slippage
- Minimised discrepancies
What are the main types of liquidity bridges?
There is more than one way of classifying liquidity bridges, but the classic typology calls for two main options:
- ECN liquidity bridge
- STP liquidity bridge
ECN liquidity bridge
This type of bridge powers direct order matching between market players (banks and other liquidity providers, traders, etc.).
ECN liquidity bridges would typically provide raw spreads and a fixed commission. They’re famous for fast execution, great transparency, and support for various order types.
STP liquidity bridge
This type of bridge will quote a broker to one or multiple liquidity providers without involving dealers. Trades are often executed at the best price that a liquidity provider can offer. Spreads are variable, and there are no fixed commissions as brokers earn through spread markups.
Tip: Find out more about ECN and STP models by reading an expert article by TFB’s CEO, Alexey Kutsenko.
What are the characteristics of a liquidity bridge
Liquidity bridges come in many shapes and forms.
For a long time, the industry was bursting with centralised liquidity bridges that gave limited access, visibility, and control to brokers. The liquidity bridge vendor had all the power, and the broker was basically operating a black box.
Tools for Brokers (TFB) was among the first liquidity bridges to offer an alternative approach.
Instead of forcing all clients to comply with the liquidity bridge’s default settings and configurations, TFB created a bridge where everyone could choose how to set it up and configure the execution elements that best suit their business model.
So when it comes to key characteristics of a liquidity bridge, the top two are transparency and flexibility. There are no two brokerages that are the same, and every business deserves tools that serve them, rather than technology they have to struggle with and create workarounds for.
The next essential element is built-in risk management. Brokerages are constantly walking on thin ice, and it’s paramount that a liquidity bridge has several readily available tools to protect the company from every potential market risk.
Data management is the next element that a modern bridge can’t do without. Data is king, and easy access to alerts, real-time monitoring, and reports makes a world of difference. Timely analytics will help brokers not only prevent or minimise risks, but also make the most of trends and tendencies, tailoring their workflow to specific market environments.
Last but not least is advanced execution. We’re talking multiple aggregation modes to find the best pricing for any type of order, smart routing rules, and access to a wealth of reliable liquidity providers.
The risks and challenges of liquidity bridges
Liquidity bridges are great for linking brokers with liquidity providers and facilitating trades.
That’s not to say they don’t have any risks or challenges associated with them.
Here is a quick list of everything you need to watch out for when it comes to a bridge:
- Latency issues
- Order rejection
- Execution delays
- Technical failures
- Lack of compliance
Additionally, the lack of reliable liquidity providers that are connected to the bridge can lead to delays and shortages during high market volatility.
All these challenges can negatively affect the trade’s outcome, the broker’s reputation, and profitability, so they need to be handled carefully.
FAQ
What is a liquidity bridge?
A liquidity bridge is a solution that connects brokers to liquidity providers and helps facilitate trades.
What assets do liquidity bridges support?
The types of assets that a liquidity bridge supports depend on the particular bridge. Some (although it’s becoming less popular recently) are single-asset only, while others support a range of assets, including Forex, CFD, crypto, and indices.
Are liquidity bridges safe?
The solutions are generally safe, but some aren’t as reliable as others. Built-in risk management, data protection, and analytics tools help make a bridge solution more secure and reliable for brokers.
