How A Liquidity Provider Makes Money?
Forex is the biggest financial market with a daily trading volume of more than $7 trillion. As a result, newer traders and investors strive to capitalize from the fiat assets. However, retail traders can access the market only with the help of White Label FX brokers. The latter also need help from the liquidity aggregators that provide solutions to instantly execute traders’ Bid/Ask orders.
Is it a must-have to partner with a liquidity aggregator?
Experts roughly divide Forex brokers into two categories:
- Brokerages that operate as market makers;
- Companies that cooperate with liquidity providers.
There is an order book provided by registered traders only, maintaining the platform’s liquidity in the first case. When it comes to the top currency pairs, the order may be filled instantly. As for fewer in-demand pairs, price slippage and gaps occur. Therefore, investors cannot get their orders executed at a market price.
Forex liquidity aggregators connect brokers with the top financial institutions (banks, hedge funds, investment funds, etc.). The latter fulfill trader’s requests directly by Credit Suisse, Goldman Sachs, Morgan Stanley, and other venues.
Expenses of brokerage companies. Ways liquidity providers make money
A newcomer FX broker strives to reduce expenses on White Label Forex company; this is why business founders need to deal with high-end LPs. What are the main ways to make money?
1) Spreads and swap;
2) Additional commissions.
The first notion describes the difference between Bid/Ask rates. For example, the most trustworthy aggregators provide spreads starting from 0. The less in-demand currency pair is, the higher the spread number.
For example, EUR/USD is the most popular pair in the FX market. High-end liquidity providers offer the spread starting from 0. This is why traders can get their EUR/USD executed at a market price and face no losses. On the other hand, some less popular pairs (e.g., CHF/JPY) have a higher spread (Bid rate is 122.757 and Ask rate is 122.856).
Remember that spread numbers are constantly changing since they depend on market activity. However, top LPs do their best to make those updates invisible to investors.
When it comes to commissions, some providers charge fees from the Forex prime brokers to open access to the deepest liquidity pools. Brokerages make those payments depending on the overall turnover.
After the FX broker understands how an LP makes money, another challenging task appears. Newer players need to deal with a trustworthy partner.
B2Broker is a leading company that provides minimal spreads for 70 FX trading pairs and instant order execution on the White Label trading platform (starting from 12 ms). Besides, B2Broker offers leverage multipliers for margin trading (the maximum ratio is 100:1).
Specialists discuss conditions and fees to make them convenient and transparent for business owners. As the company provides no hidden commissions, B2Broker helps newcomer Forex brokers grow and reach new heights.
Interesting Related Article: “5 Reasons Why Forex Traders Might Fail“