Milena Moon is the head of media projects in the marketing department of the B2Broker Group. Milena's career began in 2018 as a freelance social media journalist. Since then, she has sought out and written about the latest crypto trends, from news in the sector to educational articles that help newcomers immerse themselves in the crypto industry in the easiest way possible. Milena also has experience and education in the TV industry, which help other B2Broker projects thrive.
Trading in financial markets is a golden age for businesses, offering ample opportunities for capital growth in cryptocurrency, Forex, or other types of trading. A sophisticated trading platform infrastructure integrates multiple software and system suites to provide an optimal environment for creating, placing, and executing orders. A liquidity bridge is a system that connects traders with multiple liquidity providers to ensure successful transactions through the trading platform.
This article will shed light on what a liquidity bridge is, what types of liquidity bridges exist, and what characteristics they have.
- The liquidity bridge is a specialized software working in a group with different systems and providing connection between liquidity providers and end users.
- Today, in most cases, two types of liquidity bridges are used, ECN and STP, which, with their unique features, ensure the consistency of the necessary level of liquidity in a particular capital market.
What is Liquidity Bridge, and Why Is It Important in the Trading Process?
If you are familiar with Forex trading, you have probably heard of the liquidity bridge. This innovative tool offers traders significant advantages by providing direct access to the international banking market through an electronic trading platform. In this case, the organization of trade between the broker and the client has greatly facilitated thanks to the software, similar to the popular MetaTrader 4.
Instead of an individual trader transmitting his order to the liquidity providers, the liquidity bridge protocol handles all requests through one centralized mechanism. Straight-through processing technology allows traders to receive up-to-date quotes and liquidity without the need for multiple intermediary stages of transferring information.
The broker, in turn, gets an opportunity to provide its clients with higher-quality transactions while reducing its risks. In addition, the liquidity bridge allows the broker to manage his costs since he determines his own commissions and margin requirements. In general, the liquidity bridge is quite a reliable and secure tool, allowing traders to implement their trading strategies more effectively and with minimal risks. It is important for any trader, regardless of his level of experience.
The liquidity bridge is the central link within the liquidity aggregation in the pool from different sources, allowing the broker, regardless of its operating model, to provide its clients with the best trading conditions through a quality and fast order execution process with minimum delays and the best market prices without spread. This technology provides a smooth and secure way to work with any trading platform including different features like risk management etc., regardless of its technical characteristics and features.
As statistics show, today many brokers and exchanges prefer to use the STP liquidity bridge, because its features help to significantly speed up the processing of orders and reduce transaction costs.
What are the Main Types of Liquidity Bridges?
Currently, progress in the field of electronic forex trading has brought impressive results, in particular as part of infrastructure systems or liquidity bridges providing a link between liquidity provider and liquidity pool or broker who use it to maintain trading volumes. In this context, there are two independent types of liquidity bridges, which find their application in Forex trading firms and other areas.
ECN Liquidity Bridges
The ECN system is highly progressive due to the growing popularity of trading among private traders and increased transparency. With it, all traders can place orders in the market, not just market makers, which increases overall turnover and liquidity. With ECN’s liquidity bridges, clients worldwide can be connected, facilitating round-the-clock trading, faster execution times, and reduced spreads. In addition, the ECN system acts as the counterparty for all trades.
In fact, with ECN bridges, trading on the OTC market becomes analogous to exchange trading. The trading floor (system servers) accept orders from participants via electronic channels and, deployed on its software, organizes their processing in such a way as to bring together the opposing and thus execute them at the best price. The only difference is that at the exchange, only professional participants (brokers, dealers, market makers, etc.) can access the internal electronic network. In the case of ECN, this network connects everyone – buyers and sellers, regardless of account size, brokers, and liquidity providers. The last one guarantees the execution of deals and the closing of open positions.
STP Liquidity Bridges
In fact, STP is a system of execution of orders, which, in turn, are sent directly to the foreign exchange market. The trader receives quotes from liquidity providers with which the brokerage company cooperates. STP-broker places the clients’ orders on the market on behalf of the trader and cannot influence the price indices or interfere in the trading process in any way. STP-broker earns on the commission of each trader’s transaction, so the company is interested in the client’s success.
As part of the STP liquidity bridges, traders’ orders are sent directly to the interbank. The purpose is to ensure the instance in their execution. Having access to the whole range of bank institutions, the broker can choose the most favorable of them by the conditions. Since this scheme can work without failure only if the broker and the client have no conflicts of interest, and he will not lead against the trader. It is possible when client orders are automatically redirected to the bank supplying liquidity when the broker’s interest consists only of commission.
What are the Characteristics of a Liquidity Bridge
The liquidity bridge, which is a complex system that ensures a stable process of supplying liquidity to various participants in the financial market, has certain characteristics that determine the quality of liquidity transfer from the liquidity provider to the subjects of market relations, be it brokers or trading exchanges. Let’s consider them in more detail below.
The liquidity bridge capacity means a conditional characteristic of the liquidity bridge, which reflects the real speed of liquidity transfer from the liquidity provider to the broker or the exchange. This indicator depends on many factors, in particular on the amount of liquidity resources, the total volume of which determines the bridge channel throughput level. The carrying capacity is also affected by the state of the bridge itself, namely its technical condition, software updates, etc. In general, the bandwidth determines the speed of liquidity transfer from the source to the consumer.
The flexibility of the liquidity bridge is expressed in the possibility to apply other software solutions that in tandem with the bridge create the necessary conditions in which increased efficiency of the whole system of liquidity aggregation, its distribution and use is observed. The solutions affecting the liquidity bridge operation include systems of algorithmic modeling of assets pricing (value) as part of currency pairs and other assets trading.
As any liquidity bridge is a complex element of the liquidity aggregation ecosystem, it has adaptability, which is explained by the ability to change the bridge software’s internal processes to provide the most efficient liquidity distribution procedure between the parties involved in this process. Adaptability also provides the ability to customize the liquidity bridge (its software code) so that its characteristics meet the requirements of different brokers and different types of liquidity. In particular, it concerns the STP system, which gives direct market access that allows you to reduce different operational costs.
Liquidity bridges play an essential role in all the processes of financial asset trading. By linking the source of liquidity (liquidity providers) and the end consumer (trading systems), they provide an uninterrupted flow of funds to cover certain assets’ needs, thereby ensuring financial markets’ stability. This technology will likely undergo significant changes with the development of electronic trading.