Liquidity is at the core of every broker’s offering. It is a basic characteristic of every financial asset - be it a currency, stock, bond, commodity or real estate.
The more liquid an asset is, the easier it is to sell and buy on the open market. Foreign exchange is considered to be the most liquid asset class.
Brokers can source liquidity from a single or multiple source, thereby delivering to their clients enough market depth for their orders to get filled.
The main characteristic of liquidity is its depth, which will determine how quickly and how big of an order can be executed via the trading platform.
Liquidity can be internal or external depending on the size and the book of the broker.
Companies which are large enough and have material client flows consistently are creating their own liquidity pools from the order flow of their clients, thereby internalizing flows and saving on costs to send customer orders to the interbank market.
By doing that however they are exposing themselves to carry the risk on the trade.
Liquidity providers can be prime brokers, prime of primes, other brokers or the broker’s book itself.
Traditionally brokers are split between internalizing flows and offloading trades of their clients to different liquidity providers.
Generally, retail brokers and their clients prefer more liquid assets which lead to better fill rates and less slippage.
When there is lack of liquidity on a certain market, slippage can occur - the order is executed at a price which is the closest available to the one requested by the client.