Selecting the Right Liquidity Provider: Beyond Basic Considerations

Choosing the right liquidity provider (LP) is a critical decision for forex brokers who aim to offer the best trading experience for their clients. While liquidity quality and reliability, technology and pricing, and customisation capability are fundamental factors considered by brokers when selecting an LP, there are other more technical aspects that require careful attention. In this article, we will delve deeper into these technical aspects and show why they are crucial to the success of a forex brokerage.

Selecting the Right Liquidity Provider: Beyond Basic Considerations
Selecting the Right Liquidity Provider: Beyond Basic Considerations

Understanding the Net Open Position (NOP) Limits

One crucial aspect to consider when choosing an LP is the Net Open Position (NOP) Limits. Each LP has internally established limits that depend on the acceptable risk level of the provider and its liquidity suppliers. Several factors can influence the NOP limit, including instrument liquidity, instrument volatility, instrument correlations, and the distribution of exposure. 

For instrument liquidity, larger limits are typically set for more liquid and popular instruments, while smaller limits are set for exotic ones. As for instrument volatility, those with prices that can change significantly during the day, such as indices or oil, will have different limits compared to more stable instruments like EURUSD.

Instrument correlations also play a crucial role in setting NOP limits. LPs may combine correlated instruments, such as WTI and Brent oil or American indices, into one NOP limit.

Moreover, LPs may apply different approaches depending on the distribution of exposure. If net exposure is generated by one high-net-worth individual, the LP may take a different approach than if it were generated by hundreds of traders.

Brokers must be aware of these limits to understand the risks they can hedge with a particular LP. Failure to comprehend these limits may result in rejected orders or the broker being asked to close part of their exposure. By considering these factors, LPs can set appropriate NOP limits and manage risks effectively for themselves and their clients.

Flexibility and Symbol Settings Adjustment

Another critical aspect to consider is the flexibility and symbol settings adjustment provided by the LP. In addition to the range of financial instruments, brokers must also consider the underlying instrument, contract sizes, multiplier currency, trading hours, and decimal places of symbols. Comparing symbol settings is as important as their availability, as significant differences in settings can make it impossible for the broker to use some instruments.

You can’t do business with people you don’t trust

In every business, partners should aim to build a relationship based on trust. Therefore, it’s crucial actually to know and have trust in the professionalism of the people who will be making the decisions influencing the Broker’s business. The same rule applies when choosing the best liquidity provider for your brokerage business. The decisions made by the LP’s team, especially when there’s a conflict of interest, can have a huge impact on the success or failure of the Broker’s business.

End-of-Day (EOD) Reports

Brokers must also consider the time of generating EOD reports to their needs. Operating in different time zones may mean that the broker’s EOD is several hours apart from the LP’s. This discrepancy can cause problems in calculating the Capital Adequacy Ratio (CAR) and reconciling daily profits when two reports are several hours apart, especially when having a hedge account operating in the FIFO model.

Partnering with the Right Liquidity Provider

Selecting the right liquidity provider (LP) is crucial for forex brokers who want to provide their clients with the best possible trading experience. Besides liquidity and reliability, brokers must also consider technical aspects of cooperation with their chosen LP, including understanding the Net Open Position (NOP) Limits, trusting the people you’re doing business with and the flexibility of adjusting symbol settings. By taking these technical aspects into account, brokers can ensure they are partnering with an LP that is well-suited to their needs and can provide them with the support they need to succeed in the forex market.

That’s a summary of a piece written by Michał Karczewski for Finance Magnates as a part of the Forex Liquidity series. Should you have any questions or would like to discuss the details of our Liquidity offer, please contact our team.

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