This article was written by Aleksey Kutsenko, founder and CEO of Tools for Brokers.
Nowadays there are a lot of liquidity providers on the market. All of them offer approximately the same conditions of cooperation. That’s why in this article I’d like to give some tips on how to choose liquidity providers.
Commonly the pricing conditions of LP depend on your trading volumes.
So my first tip for you is to bargain with liquidity providers! In most cases they will be ready to give you a discount, especially if you are switching from another LP.
Another pricing scheme may include lower commissions together with the spread markups. In order to calculate the price of transaction, you should know the size of the LP’s commissions and information on the average spread. You should also request trial quotes feed and compare quotes with competitors.
So, spread and commissions constitute your final costs. Low spread will allow you to make your own markups and earn extra money on it. If your trading platform opens separate positions in opposite directions, rather than opening total positions (for example, MetaTrader4), then you should keep in mind that you will pay a commission for order opening and closing.
For instance, 1 lot of USD/JPY on MT4 will equal 200,000 USD of traded volume, as LPs count the transactions volume, and in this case there were two operations- order opening and close- which is the opening of the same amount in the opposite direction.
After selecting liquidity providers, you need to choose the dedicated software to perform transmission of orders to LP.
If your platform has a built-in solution, then you are lucky. In most cases you will need to purchase a separate module for coverage. Such modules are called bridges.
When choosing the bridge, find out what types of orders are supported and how are they processed. In particular, learn about support of limit and stop orders and how are they displayed on the liquidity providers. Often bridges execute these types of orders only at their activation time on the platform. This may lead to delays in execution and excess price slippages. However, choosing a LP that supports these types of orders will help you to avoid such problems.
If you are working by the instant execution model and decided to hedge transactions of some customers you should look for special bridges supporting instant execution, however keep in mind that these bridges are very rare. The demand for them is low, because instant execution is usually used by market maker brokers. Moreover, the coverage on LP with instant execution mode has certain difficulties, which I mentioned in my previous article.
The cost of the bridge is often comprised of the set up fee and volume-based fees and/or fixed monthly fee for the service. To determine which option suits you better you should consider your performance.
If you plan to hedge large volumes of customers’ orders, it might be better for you to find a vendor that doesn’t charge commissions for traded volume, but has fixed service fees. If you are just starting a business, ideally you should find a vendor who doesn’t have a set up fee but will charge bigger volume commission instead. This model is less suitable for business with big turnover; however, if your client base is still small and you don’t use the bridge to full capacity, you will not have to pay for the bridge downtime.
By the way, like liquidity providers, companies providing bridges can also make individual concessions.
This article was written by Aleksey Kutsenko, founder and CEO of Tools for Brokers Inc. and member of the Dispute Resolution Committee of FinCom.