The Forex market has evolved and now offers a wider range of options due to the introduction of new trading platforms and electronic systems. Nonetheless, lesser-known brokerage companies are challenging well-established firms and key players in the market. Competing with other businesses, startups can either offer the same services or reduce their prices.
With the assistance of prime-of-prime liquidity providers and prime brokerages, smaller brokers have the potential to earn substantial profits in the Forex market by being linked with larger brokers. Startups can tap into the large market by offering these services.
Prime Brokers And How They Work
Prime brokers, such as JP Morgan, HSCB, Citi Bank, and Morgan Stanley, are wealthy financial institutions and banks with operational capitals that rival those of small countries. They have access to significant fund pools and liquidity assets, controlling and distributing these supplies according to FX market conditions.
FX prime brokers offer a wide range of fiscal services, including liquidity sources, risk assessment, capital management, financial consultancy, and invoice settlements. They can even handle the entire portfolio of one or many departments within the brokerage.
Prime brokerage is typically offered to high-portfolio clients and trading brokers, offering extensive funding pools and investing in companies to offer cash flow or capital sources.
FX PBs charge a premium fee for their competitive finance services, putting FX brokers on par with whale traders and key players to acquire the largest market share. They also invest heavily in intelligence and research, giving them a competitive edge over competitors and connections with policymakers and influential market executives.
Prime-of-Prime Brokers And How They Work
PoP liquidity suppliers emerged to bridge the gap between established FX businesses and new FX retail brokers. Large players expanded their user base, while startups struggled to gain access to key investors and users. Medium-sized brokers struggled to connect with prime brokers due to high fees and extensive service offerings.
PoPs offer affordable rates and moderate service packages, allowing retail brokers to compete with key market players. PoPs are more diverse and suitable for FX brokers, offering services and functionalities that investors and retail traders demand. They provide flexible brokerage solutions, high scalability, and custom pricing plans.
PoPs are more affordable than prime brokers due to their smaller size and personalised offers. They consolidate liquidity and order books, providing FX brokers access to a wide range of asset classes and securities at the best trading conditions.
Retail FX brokers, for example, are clients of PoPs as they are too small to deal directly with big banks and access their liquidity. By linking with big banks, retail brokers can access live price quotes from major banks, which they then offer to their clients.
They can also mark up the spread received from tier 1 banks, generating revenue for PoPs and retail forex brokers. This markup in the spread is one way PoPs and retail forex brokers make money, along with charging commissions on each trade. The more PoP accounts or links a retail broker can get, the better their liquidity.
PoP services provide traders with access to more liquidity and products not offered by standard prime brokerage accounts, such as non-deliverable forwards (NDFs). However, the PoP structure faced scrutiny in 2015 when the Swiss National Bank removed its peg of 1.20 Swiss francs per euro, leading to a 41% drop in the euro and Swiss Franc currency pair. This event led to PoPs lifting the funds needed for capital requirements and enforcing risk management protocols.
Bottom Line
Prime-of-Prime brokerage and PBs are two widely used methods by FX brokers to offer liquidity. While there may be some similarities, these two models have distinct methods of operation. The popularity of PoPs tends to be greater among medium-sized platforms and retail brokers that have a limited range of services. Prime brokerage is more suitable for large FX brokers seeking advanced services such as guidance, financial management, and risk assessment. Determining the most effective way to liquidate assets quickly is contingent upon the nature of the FX business, the available funds, and the specific objectives.