A hub as its name suggests describes the center of activity or a focal point. In terms of finance, the term hub can refer to Hub and Spoke Trading or a liquidity hub.
However, the terms are not interchangeable, but they do overlap. Hub and Spoke trading refer to a network that posts bids and offers for an asset and therefore creates a real market.
For example, Hub and Spoke trading allow traders to see the other submissions and offers from other traders on the platform.
This is a popular method used by cryptocurrency exchanges. This method provides transparency and allows traders to see the depth of the market.
It also allows for more competitive pricing because there is no trading desk and no price manipulation.
The disadvantage of this type of platform is that sudden market volatility can shift all traders to one side of the market or the other.
There can be all buys and no seller or all sellers and no buyers.
Liquidity Hubs Explained
This leads us to a liquidity hub, which platforms and brokers use to process each trade on their platform.
When many liquidity providers join together to form a liquidity hub, they can also process trades whether they are more buys then sellers or vice versa.
Deals can be processed faster for lower costs. Liquidity hubs allow brokers to deliver tight spreads into their traders and execute client orders at the best available prices from multiple liquidity providers.
Liquidity hubs are traditionally hosted in premier data centers with a high concentration of trading participants such as Hong Kong, Chicago, or New York.
These hub services provide full redundancies on the equipment and network supporting them, including the international pipe to primary and secondary data centers.