The bridge or liquidity bridge is an essential component for brokers that are enabling their clients to trade at interbank rates directly via a Prime Broker or a Prime-of-Prime (PoP).
While market makers do not require a bridge in order to service its clients, brokers which are sending through orders to a liquidity provider or an electronic execution venue need a bridge to connect their trading platform to the interbank market.
Bridges are used extensively in forex trading, specifically for Metatrader, the world’s most popular trading platform.
Bridges can be connecting a broker to a prime of prime or to a prime broker.
Connectivity providers are delivering solutions mostly oriented towards the most popular platforms in the market – MetaTrader 4 (MT4) and MT5.
The component is another crucial part of proper risk mitigation for the brokerage.
The Need for Bridges in Retail Trading
Given the rise of the MT4 and MT5 platforms, there has since arose a need for bridge technology.
This is due to the fact that Metaquotes, the company behind MT4, only envisaged their platform being used as a purely an interface client broker trading.
This means the broker set the quotes, set the spread, and traded against the client.
However, the trader actually had no direct access to the wholesale forex market, yet many brokers were unwilling to let go of MT4 in favor of other platforms which already inherently supported access to the market via Electronic Communications Networks (ECN) due to MT4’s huge popularity and thus potential loss of clients.
MetaTrader was not designed to communicate with banks or liquidity providers because Metaquotes didn’t implement the FIX protocol (Financial Information Exchange).
The FIX protocol is an electronic communications protocol setup in the early 1990’s to provide worldwide exchange of information in real time with respect to the transactions of financial markets and instruments.
As a result, software was developed by third parties to enable MetaTrader to connect traders to the interbank.