The trading landscape has expanded tremendously over the years thanks to advanced technologies that lowered entry barriers, and becoming part of this market involves many complexities and dependencies, which are necessary for the success of institutional investors and retail brokers.
Brokerage firms connect their platforms to multiple sources from where they get their stream of tradeable instruments and obtain technological and financial means to offer investing services.
This concept can be overlooked by traders and new investors. However, it is a crucial aspect for brokers. Let’s review how liquidity providers work and how you can find a regulated partner to launch your services.
The Role of Liquidity Providers
Investment brokerages derive their trading operations and assets from tier-1 financial institutions, such as investment banks, hedge funds and corporate investors. These entities are directly connected to marketplaces of stocks, bonds, ETFs, cryptocurrencies, commodities and Forex and provide trading platforms with bridges to these sources.
Therefore, if you are launching your brokerage firm, you need to find a provider that offers deep market liquidity to the range of products you are willing to offer to your users. The deeper the market access is, the better the trading conditions are for your clients.
Recently, new types of LPs have emerged, such as prime brokers and prime-of-prime brokerage systems or tier-1 and tier-2 providers.
Prime brokers are tier-1 financial institutions and sources that give large investors and brokerage firms access to trading markets and financial instruments to benefit from the reliability and validity of the provider.
On the other hand, the prime of primes are tier-2 intermediaries that gather liquidity from multiple pools and sources and offer the deepest access to consolidate order books, allowing brokerage firms to get a wide range of tradeable financial securities.
Finding a Regulated Liquidity Provider
The liquidity provision market is crowded with tens of companies and banks offering financial and technological solutions that boost brokerage companies’ services and coverage. So, how do you decide on the right LP for you? Here’s what you need to consider.
Industry Leadership
Find a supplier that demonstrates great market expertise and knowledge. This is not only valuable for getting one of the best access to tradeable assets, but it is also an excellent way to rank your company among the best key players.
Leading LPs have a broad network of connections, including policymakers, regulators, central banks, investment institutions and hedge funds that offer great intel on upcoming market trends and investing opportunities.
This allows you to allocate the right resources and offer the best trading instruments for your investors to capitalise on unprecedented gaining opportunities.
Regulatory Compliance
Regulated trading markets follow strict regulations regarding acquiring business permits, declaring financial transactions, and providing information to business board members. Therefore, the chances of falling victim to a scam scheme are so small.
Some financial regulators offer financial insurance for participants, which may cover your losses if the LP defaults or faces a financial crisis.
Additionally, you are more likely to attract more customers and investors to your platforms by associating your name with a regulated provider who maintains stable liquidity flows and volumes.
Flexible Approach
Reliable providers offer customised pricing plans according to your budget or requirements, allowing you to boost your service without paying exaggerated fees or paying for services that you do not want.
Also, check out the provider’s communication style and ensure there is an uninterrupted feed regarding expected market changes and flow fluctuations whenever they happen. This helps you prepare your platform and avoid investors’ frustration.
Supported Instruments & Asset Classes
Review the range of supported assets and markets and ensure you find the financial instruments that you and your clients are comfortable with.
Logically, the more the tradeable securities are, the better. However, ensure that you are not paying too much for additional instruments that your clients are not interested in.
Conclusion
Liquidity is a key term in financial markets and a crucial factor for the success of brokerage companies. These entities provide brokers and intermediaries with market access and the means to execute orders in various markets.
Prime of primes and Prime brokers are two types of liquidity provision that suit different business sizes. Therefore, determine your business objectives and your client’s requirements before choosing the right liquidity partner.
