What You Should Know About Forex Liquidity Solutions11 min read

What You Should Know About Forex Liquidity Solutions11 min read

In this article, we’ll learn about forex liquidity solutions — what they are, why liquidity is important, which one is best for you, and which one to choose. 

At the end, you’ll know exactly how to implement this important-yet-forgotten-too-much aspect of trading the forex market properly.

The forex market is massive – it is the largest and most liquid financial market in the world. Trillions of dollars flow through the hands of banks, companies, fund managers and individual investors who trade in currencies every day. 

Despite its enormous scope, the forex market comes with unique liquidity issues that all traders need to be aware of.

What are Forex Liquidity Solutions?

In simple words, a forex liquidity solution is a liquidity provider’s service that increases liquidity for traders on one platform or brokerage. Liquidity is defined as the ease at which an asset can be acquired or sold, without altering its price. 

Liquidity in the forex market depends on how many people can buy or sell the market and how big their trades are.

Liquidity suppliers such as The Kingdom Bank gather liquidity from different entities – from banks, other brokers, ECNs (electronic communication networks) and proprietary traders – and provide it to platforms and brokers via APIs. 

The gathered liquidity then becomes available to end-users trading on these exchanges.

Forex liquidity solutions streamline trading by consolidating liquidity from various sources, making it easier for traders to enter and exit positions without having to react to extreme fluctuations in price or wait for orders to execute. 

They work by transferring the difference between the abundance of liquidity in interbank markets and the relatively smaller quantities of liquidity available directly to individual traders.

Why is Liquidity Important in the Forex Market?

Forex markets require liquidity for a few reasons:

• Trade execution: Increasing liquidity ensures orders can be filled quickly with minimal price slippage. In a low liquidity, matching orders to close trades may be hard to come by for larger trade sizes.
• Stability of price: Since liquidity is plentiful from all sides of the market, sudden discrepancies will not blow prices out of control. Prices are generally more predictable.
• Order filling: Deep liquid pools help traders to fill orders and exit orders without consuming the depth of liquidity available at a specific price level. Orders are more likely to be fulfilled.
• Volatility control: Adding liquidity also mitigates volatility as the market is occupied with big buyers and sellers. Spikes and dips are usually less dramatic.
• Cost-efficiency: Strong liquidity options enable traders to have lower spreads as liquidity providers can offer lower prices while recouping the profits from flows.

Liquidity in the forex market improves trading conditions for everyone as it facilitates faster execution, more consistent pricing and reduced costs. 

It’s no wonder liquidity reigns supreme in such a globalised market.

What are the Types of Forex Liquidity Solutions Available?

There are several basic types of forex liquidity solutions, based on how liquidity is acquired and routed:

Direct Market Access

DMA services allow traders to have access to and trade directly in the liquidity pools of big banks and other big liquidity providers. This gives you the deepest liquidity but requires advanced infrastructure.

Liquidity Aggregation

As explained above, liquidity aggregation involves gathering liquidity from multiple sources and redistributing it through APIs. It’s the most common form of offering for retail brokers who want to boost their client liquidity. The Kingdom Bank offers high-quality liquidity aggregation.

Liquidity Distribution

Liquidity distributors pull liquidity from internally developed traders and systems rather than from the external pools directly. This liquidity is then allocated to platforms.

Liquidity Bridge

A liquidity bridge allows access to non-cooperative liquidity pools, such as broker liquidity and the order book of an exchange. This expands the liquidity floor.

The type of solution you choose depends on things such as the counterparties you prefer, the infrastructure capabilities, the risk tolerance and the business model. 

The majority of platforms integrate methods for varied liquidity sourcing.

Are Forex Liquidity Solutions Customizable?

The beauty of working with a full-service liquidity provider such as The Kingdom Bank is that you can adapt the liquidity solutions to fit your needs and trading patterns. 

Liquidity solutions can be customized in these specific ways:

• Instruments – Adjustable support for currency pairs, spot vs forwards, cryptocurrencies, etc.
• Pricing models – Dynamic spreads, fixed spreads, or hybrid strategies minimize costs.
• Liquidity depth – Set the depth of books, volume limits, and order sizes.
• Risk control – Adjust features such as automatic exits, position thresholds etc.
• Integration – Integration through API, FIX protocol, or custom client interfaces.
• Reporting – Set up dashboards to display your favorite volume, fill, spreads and more.
• Support – In-house account managers help onboarding and support.

Consultation ensures the liquidity solution will fit seamlessly into your platform, trading strategy, and risk regime. The Kingdom Bank engages with clients at every level for fully customized liquidity.

What Should You Consider When Choosing a Forex Liquidity Solution?

There are so many liquidity providers on the market that you need to choose one based on your requirements. 

These are a few of the things you need to consider when researching forex liquidity solutions:

• Liquidity source – Think about the range of sources, from banks to ECNs to proprietary flows.
• Instruments supported – Check support for your popular currency pairs and pairs of interest.
• Pricing models – Compare spreads and any volume discounts. Tight spreads reduce costs.
• Fill rates – Check third-party reports of the provider’s ability to provide clean order processing.
• Connectivity – Get ready for easy connectivity to your platform through the protocols you prefer.
• Modification – Make sure you’ll have the ability to customize the solution as your business grows.
• Risk controls – Review available risk management tools, such as position limits and auto-liquidation.
• Reporting – Ability to view real time volumes, fills and spreads helps measure performance.
• Support – Effective before, during and after onboarding support helps mitigate the deployment process and issues.
• Image – Look up industry reputation, experience and regulatory violations.

By carefully considering all of these, you can find liquidity providers that are solid and trustworthy partners to support your offering and trader experience in the long run.

Being an integral component of the global forex market, liquidity is fundamental to ensure efficient trading. By establishing an intimate knowledge of forex liquidity solutions and the ways that trusted providers such as The Kingdom Bank customize them, platforms and brokers can choose the right vendor for their clients to access the maximum possible trading potential. 

Accessible yet robust liquidity helps satiate traders and maintain long-term brand trust. If you are seeking specialized liquidity services for your platform, work with a proven provider such as The Kingdom Bank to bring the most out of your platform. 

Our advisory services guarantee a seamless integration that elevates your value proposition within the marketplace.