In the foreign exchange market, some traders do not pay attention to the liquidity suppliers of foreign exchange brokers. The reason may be that they feel that liquidity is a matter for banks and forex brokers, and has nothing to do with traders. In fact, liquidity is very important to foreign exchange brokers and traders. In this issue, Mr. ATM will talk to you about foreign exchange liquidity providers.
Liquidity refers to the cost for investors to quickly execute a certain number of transactions at a reasonable price according to market supply and demand conditions. That is to say, the higher the liquidity of the market, the lower the cost of instant transactions. Generally speaking, lower transaction costs mean higher liquidity, or correspondingly better prices. The stronger the liquidity of the foreign exchange market, the smoother the transaction and the more competitive the quotation.
No.1
What is a foreign exchange liquidity provider (LP)?
The foreign exchange liquidity provider is the receiver who clears the order to the international market. The liquidity provider provides the liquidity data service of the inter-bank foreign exchange market, captures the best price and feeds it back to the downstream retail foreign exchange broker. These liquidity providers focus on the development of liquidity technology and provide technical support for the STP/ECN model of small and medium foreign exchange brokers. In addition, liquidity providers generally connect with more than two large banks, usually with another backup to ensure the continuous stability of liquidity.
Because access to the liquidity of large banks requires a high amount of cash capital, generally speaking, directly connecting these banks requires a deposit of US$1 million, and needs to create a profit of US$100,000 for the bank every month. In addition, there are High technical threshold. Therefore, most retail foreign exchange brokers do not directly contact large banks, but obtain liquidity through liquidity providers.
In other words, liquidity providers are a role between large banks and brokers.
No.2
How to judge the quality of an asset liquidity?
The quality of liquidity can be measured from three aspects, namely speed, price and quantity.
Speed refers to the immediacy of the transaction. When the liquidity is sufficient, the trader can complete the process of buying and selling immediately; on the contrary, when the liquidity is insufficient, the seller or buyer investor cannot find the counterparty immediately, and the transaction cannot be completed smoothly. .
At the price level, investors can immediately find their counterparty and make a deal at the lowest possible cost when the asset liquidity is sufficient. The most common measurement indicator is the bid-ask spread, so when investors can trade with a sufficiently small bid-ask spread within a certain period of time, we say that the liquidity of the asset is sufficient.
Quantity refers to the number of transactions, that is to say, when a large number of transactions or orders are executed immediately at a reasonable price in a short period of time, we can say that the liquidity of this asset is sufficient.
No.3
About Liquidity Levels
Under normal circumstances, the more orders and the greater the trading volume, the better the liquidity. In extreme cases, when everyone just wants to sell the orders in their hands at the same time, the liquidity will dry up and the price will drop. It will drop again and again, which is the so-called flash crash.
Therefore, the top liquidity mainly comes from world-class big banks, including Citibank, Deutsche Bank, HSBC, JPMorgan Chase, UBS, ABN Amro, etc. (there are also some insurance and fund companies, such as Quantum Fund, BlackRock and others also have the right to quote in the foreign exchange market), theoretically all orders end in these banks, so how do these banks deal with it?
— Hedge!
——What about the endless hedging?
— throw each other.
For banks, if a certain bank accepts too many orders and holds too many net positions, it is a very risky thing, so if a bank has finished hedging, it still has 10,000 European and American empty orders , it will call out a price to its inter-bank partners, and the banks with enough orders in their hands will take these orders and close their positions.
Of course, it is impossible for the market to always be half empty and half long. The part that cannot be resolved by the banks throwing each other is the bank's risk position, which is also used for speculative profit. This part will not be too much. Therefore, the bank will also judge which orders are necessary and which are not based on its own risk control system. When a certain currency pair is trending one-sidedly, the bank will not foolishly swallow the reverse order. liquidity will also be reduced.
Similarly, liquidity providers are divided into different levels. The closer to the level of the interbank foreign exchange market, the better the liquidity.
No.4
Why access liquidity providers?
After the "black swan" incident of Swiss banks in 2015, some banks closed their prime brokerage business, and some banks raised the threshold for cooperation. For example, after the "Black Swan" incident, the bank has required the assets of the cooperative brokers to reach a certain scale, otherwise they will no longer open accounts for these brokers. The assets and transaction scale of retail brokers are small, and the first-tier banks are too far away for them. Few foreign exchange retail brokers directly connect with international banks, and they all connect with foreign exchange liquidity providers to transfer transaction exposure risks in order to execute customer order.
No.5
What liquidity providers are there?
At present, the well-known liquidity providers in the market include LMAX and CFH.
LMAX is a foreign exchange gold exchange registered in the UK and regulated by the FCA. LMAX is also the first and only top European financial company in Europe to adopt the Multilateral Trading Facility (MTF) with an exchange license and a broker license. LMAX Exchange remains neutral and fully transparent. All customers trade anonymously on the platform, will not be discriminated against by transaction method or capital size, and will see the same market price, spread and liquidity. Providing retail investors with the same trading environment as institutional traders is a truly open and fair trading market.
Headquartered in London and regulated by the FCA, CFH Clearing is a world-class clearing institution under the CFH Group (CFH GROUP). Solutions, they are one of the few large institutions in the market with inter-bank straight-through processing, and have won the "Best Liquidity Provider" award many times.
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