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Aggregation or liquidity aggregation can be characterized as the process of gathering buy and sell orders from different sources and directing them to a given executing party.
This is most commonly done from multiple sources to minimize the risks from using a single liquidity provider.
By aggregating liquidity from multiple sources, the broker is able to increase the depth of market it offers to its clients and therefore deliver better fills on the order flow when compared to when it uses a single liquidity provider.
In order for liquidity aggregation to deliver the above-mentioned benefits however, an appropriate aggregation engine is necessary.
Different liquidity providers can deliver widely different quotes due to its decentralized nature.
This is why the aggregation engines which are used to enable brokers and their clients to automate order execution via multiple liquidity providers are critical to the practical implementation of aggregation.
There are several approaches to aggregation which can be both beneficial and detrimental. More liquidity providers don’t necessarily mean better fills for the clients.
Liquidity in the FX Market
Presently, liquidity aggregation has become a fixture of the foreign exchange market.
However, FX liquidity aggregation remains both a complex and technically challenging task in what has developed into an increasingly fragmented marketplace.
In parallel, the industry has also seen the proliferation of trading venues, which only adds to this complexity.
The overall aggregation business model has been faced with several challenges in recent years.
This is due in large part to liquidity providers grappling with the reality of their clients failing to utilize their respective liquidity optimized ways.
Instead, there is a vulnerability to leverage arbitrage opportunities rather than creating a stable and reliable stream of proper prices.
For this reason, liquidity aggregation looms as a potential pain point moving forward for the FX industry.