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Why do Brokerages and Exchanges need a Liquidity Provider

Business owners ready to enter financial markets frequently make mistakes. Beginners pave their paths in that way, and it sounds quotidian. Meanwhile, the fiercely growing competition makes some mistakes fatal for newer entrants; this is why don’t hasten to enter the market – dive into the details instead.

Liquidity Provider

There is the universal truth – brokerage companies and exchanges need to partner with a liquidity provider. That’s just the way it is. But business owners need to understand why liquidity providers are their catalysts on the way forward success. Let’s clear things up.

How do brokerage businesses work without liquidity aggregators?

When a brokerage company connects its order book to no liquidity pools, such a model is called B-Book. What does it mean?

Traders themselves perform the function of LPs. A broker’s order book contains ask and bid requests placed by signed-up users. The matching engine is in charge of correspondences between orders. For instance, one user places an ask order for EUR/USD, offering the price of 1.15998. When the matching engine detects a bid order with the same price, the system executes a trader automatically.

On the one hand, such a model is somehow widespread among large brokerage companies. On the other hand, a set of pitfalls takes place.

While looking at the trading pairs, some 10-15 pairs are in-demand among traders. What about other instruments? The CAD/CHF pair is traded by approximately 0.58% of users, and they are at risk of high spreads and price gaps. Imagine the situation when a trader places an ask order with the price 0.73330, but the system finds a bid order for 0.72410. Traders face price slippage and cannot execute their orders instantly.

Furthermore, the B-Book model is more suitable for large brokerage businesses with overall trading volumes over $10-20 million; otherwise, traders will suffer from the lack of requests inside the order book. Small and medium brokers cannot reach success without dealing with LPs.

How do exchanges operate without LPs?

Crypto exchanges depend on liquidity even more, as the market of digital assets is rather new, and newcomers prefer to take multiple aspects into account. When a platform displays low trading volumes, traders and investors prefer to choose another exchange.

Sometimes, platforms create a set of fake accounts to imitate the high trading activity, and such an option is not as effective as traders expect.

Newer crypto exchanges understand that the connection with deep liquidity pools sounds perfect at the beginning of their ways. LPs unite dark pools, top-rated exchanges, over-the-counter brokers, and other players of the crypto market. As such, signed-up traders get their bid and ask orders executed within milliseconds.  

Looking for the best liquidity provider

Theoretically, brokerages and exchanges may function on their own, dealing with no providers of liquidity, while LPs open new opportunities and horizons for your businesses.

Top-rated providers cover different financial instruments (e.g., crypto CFDs, FX pairs, equities, and more). B2Broker is the pacemaker of the up-to-date liquidity industry, offering ultra-competitive prices and conditions for companies throughout the world.

The company provides PoP liquidity, connecting order books with the deepest pools of liquidity.

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