Forex Liquidity Explained

Introduction to Forex Liquidity

You may have heard that the FX market is the biggest and most liquid market in the world. That’s probably what your broker said to get you all excited. Yes, it’s true that the daily turnover of the forex market exceeds 6 trillion USD. Forex liquidity is truly abundant. Most transactions are generated by governments, multinational corporations and automated trading strategies operated by proprietary trading firms. Only a small part of this massive daily turnover is from retail trading. Many retail brokers also operate an internal B Book which volume that never hits the market. 

Forex Liquidity Providers come in a few formats. First, you have banks, then you have Prime Brokers, then Prime of Prime brokers and ECN venues. A typical retail forex broker doesn’t trade directly with a bank. Banks have very high requirements. Your forex broker probably gets liquidity from a Prime Broker, Prime of Prime or an ECN.

Prime Broker Liquidity Providers are usually very large firms who trade directly with banks. Their clients are large forex brokers, hedge funds or algorithmic traders. 

Prime of Prime Broker LPs are the most common type of Liquidity Provider that forex brokers will cooperate with. They accept lower orders sizes and have lower minimum deposit requirements. 

Electronic Communication Venues are used by everyone. Generally speaking, it’s like an exchange. Participants place orders and they go into the book and are filled if there is a participant on the other side who wants to buy what they are selling. ECNs are generally very economical because there is no middle man, such as a broker charging a spread or at risk of losing money from market volatility. The venue simply charges a commission on all the trades for using the technology. 

Retail Experience of Forex Liquidity 

In the first decade of the 21st century, forex trading exploded. It became more accessible and more attractive to retail traders. Thousands of brokers entered the market. At the time, the industry was not adequately regulated to cover the new technologies that made it possible for almost anyone over the age of 18 to start trading. A lot of brokers took advantage of naive investors. Trading platforms were black boxes that weren’t connected to any execution venue. There was no transparency and it was far to easy to manipulate. The industry eventually came under scrutiny and has reformed greatly since then.  

As the average trader became more experienced there was demand for a genuine Straight Through Processing trading environment. MetaTrader 4 just wasn’t up to the job of being a proper STP platform. It wasn’t designed that way. Luckily cTrader came along with native support for Direct Market Access to Forex Liquidity Providers via FIX API

cTrader is an STP platform and was one of the very first STP forex trading platforms for retail traders. At the time it was first released in 2011, it wasn’t even possible to trade Nano Lots or even Micro Lots. The smallest order you could place was 60,000. The reason is that banks weren’t interested in processing such small orders. In fact, most Over the Counter FX desks at banks wouldn’t process orders less than 1 million. This meant that most brokers were collecting many small orders and manually hedging them. Essentially operating a dealing desk. 

There was still the problem of banks not accepting smaller order sizes. Luckily new business models and technologies solved this issue. Prime Brokers, such as IS Prime who recently integrated with cTrader were able to use order aggregation technology to collect orders from dozens of brokers, net them off and forward bigger orders onto a bank. This process wasn’t comfortable and considering the market was rapidly growing innovation was re This essentially created a new business, non-bank FX Liquidity Providers. 

Forex Liquidity Aggregation

As competition in the e-fx trading industry continued to increase, there were more firms, each bringing their own value propositions. Instead of one broker wanting to work with one liquidity provider, technology firms introduced aggregation engines. These forex aggregators would consume the price feeds of multiple LPs. This meant a broker could have access to more liquidity, which meant better overall pricing for their clients. This reduced slippage and ensured positioned could be opened and closed instantaneously.

This sounds like a very sweet deal, but it also enabled a toxic problem. The barrier to entry for an average retail broker to rebrand and transition into a Forex Liquidity Provider was essentially non-existent. The same liquidity can be sold multiple times.

As an example, with completely made-up names as references let’s say London Liquidity provides liquidity to Portsmouth Prime. Then there is a retail broker called Falmouth Forex, this broker takes quotes from two LPs. As you probably guessed, they are London Liquidity and Portsmouth Prime. If Falmouth Forex is getting quotes for 2 mil. EURUSD (half from each of the LPs) and one client places an order for 2 mil. EURUSD, that order would be partially filled, that’s because 1 mil. EURUSD didn’t exist.

cTrader and other STP Trading Platforms

cTrader was created to fill the demand of forex traders who wanted a trading environment which didn’t have a conflict of interest built into it. Some professional solutions were around, but they lacked the usability that retail clients were accustomed. The institutional platforms that were on the market were designed for professionals who just wanted to submit orders. Professional probably had other platforms, such as the Bloomberg terminal for getting their news and setting up their analysis.

Even today, there are very few STP trading platforms on the market. The competitive landscape for trading platform vendors is very thin. Over the years there have been many attempts to break into the platform provider space but it’s only really cTrader that managed to survive while MetaQuotes dominated the sector. In fact, MetaTrader 4 couldn’t actually be qualified as an STP trading platform since it uses third party bridges to connect to external counterparties to submit orders. 

cTrader offers a number of unique features that are only possible because the platform was designed for Direct Market Access trading. Inside of cTrader, you can see the level 2 pricing. This means you can see multiple tiers of pricing that are being streamed into the platform by your broker’s Liquidity Providers. This is a very important indicator that expresses a lot about a currency pair.

Who are the cTrader Liquidity Providers

cTrader is integrated with a number of forex liquidity providers. Brokers that white label the cTrader platform have their own installation. This means brokers choose which LPs are connected to their cTrader platform. This is why each broker can have different prices, market depth and trading instruments. 

Theoretically, any forex LP can be integrated with cTrader. This is only possible because most businesses and technologies involved in FX use the FIX API standard. Spotware doesn’t choose which LPs to connect with, rather it’s the brokers using the LP that make requests and demands for new partners to be integrated. Just like in any other industry, platform integrations are mostly client-driven. 

cTrader is integrated with a number of liquidity providers, such as Swissquote, Advanced Markets, Sucden Financial and many more. 

Some brokers promote on their websites that they have relationships with a number of world-leading banks such as Barclays or Deutsche Bank. The reality is that they almost never have a direct relationship with these banks. It could be the case that their LP has a relationship with an LP that has a relationship with some of these banks. It is incredibly unlikely that a bank would ever work directly with a retail forex broker to provide liquidity.

Which cTrader Broker has the Best Liquidity?

Every broker can have a slightly different configuration of Liquidity Providers and there are so many providers on the market. Generally speaking, the larger the broker, the better the liquidity. That’s because larger brokes have more buying power to influence conditions and as a more valuable client, they and by extension, their clients get treated with better service. However, when things change, such as big economic events that can dramatically influence the market, large brokers can be very risky to LPs. Indeed, LPs need to manage those risks, possibly by sending thin quotes and bad prices which can cause very bad slippage to clients. 

Generally speaking, any of the mainstream cTrader brokers will have high-quality liquidity providers streaming into their trading platforms. There is never a guarantee that you won’t get slipped or that orders will always get filled. At least with regulated brokers with a strong reputation to take care of, you know that in case something does go wrong, they will try to put it right. Consider reviewing these brokers;

cTrader Brokers
cTrader Brokers

Best cTrader Brokers is an information portal focused on the cTrader platform and the community of brokers and traders who use the multi-award-winning platform on a daily basis.

cTrader Brokers