Why Should You Work With A Regulated Liquidity Provider?

Liquidity providers (LPs) are a vital piece of the financial market’s equation. They bring stability and efficiency to markets by supplying the indispensable component: liquidity.

While traders might not always recognise the significance of LPs, often trading directly with the market or via brokerage firms, brokers continuously seek dependable liquidity sources to enhance their services.

Regulated liquidity providers promote security and trustworthiness to brokers and the market, and if you are looking for a reliable and regulated LP for your brokerage firms, here’s what you need to know.

LPs are significant monetary firms like financial organisations, hedge funds, and central banks that add funds, assets, and tradable instruments to the market through consistent market participation and activity. LPs act as market makers, continuously buying and selling currencies in the Forex market, for example, increasing market liquidity and allowing retail investors to follow them and trade with more currency pairs. 

This way, LPs increase the supply of products in the market, which decreases asset prices based on the demand and supply law and, in this case, spread. The spread is the difference between the buying and selling price, which is small in efficient markets with high liquidity. Thus, Forex brokers benefit from low spreads, improving their offerings to the market and attracting more traders and users to their trading platforms.

When there is a lack of available funds, even a little delay in completing a transaction may result in a significant price difference, known as slippage.

Overall, markets with high liquidity improve the trade execution system, ensuring that many assets are available and that numerous retail traders are eager to trade with you, allowing for swift trade execution.

Financial activity is heavily regulated, and financial authorities overwatch and set the rules for financial markets and investors. 

These rules are set to ensure illicit activities do not happen in the market and to minimise financial fraud and crimes like money laundering. Therefore, market makers, including LPs, are regularly subjected to the following frameworks.

Cyprus Securities and Exchange Commission is one of Europe's most sophisticated financial activity and transaction regulators. CySEC supervises financial organisations and European firms regarding risk portfolios, short selling, and other possible market abuses. LPs with a CySEC license are highly reliable and are subject to strict laws that ensure the safety of financial business conduct.

The Financial Conduct Authority in the United Kingdom is also one of the high-profile regulators for financial activities in Europe and the UK. It aims to promote the integrity and well-being of market participants. The FCA regulates publicly listed companies regarding credit consistency, transaction legality, and lending activity. An LP with an FCA license is highly reliable.

The Financial Services Commission in Mauritius regulates non-bank financial institutions that ensure the stability and development of financial market activities and business in Mauritius. The FSC provides a lenient framework that suits most genuine and reliable financial service providers looking to work in a legal and flexible environment. Many high-profile financial firms obtain an FSC-Mauritius license to operate in a friendly business environment and offer financial services to clients worldwide. 

The Dubai Financial Services Authority is the regulatory authority in Dubai, regulating financial activities in the thriving economic zone of the UAE. DFSA focuses on regulating companies based on the risk management policy, entailing that risk is part of the business but for a certain level, and it enforces legal actions against market abusers and violators.

The Securities and Exchange Commission in the United States is a federal entity that regulates securities and markets and is tasked with promoting market and investor well-being and fairness. SEC’s comprehensive framework includes five entities supervising investments, risk analysis, interbank foreign exchange markets, trading and securities, and corporate finances.

Financial markets are complicated systems that include many dependencies and participants. Finding a licensed liquidity provider for your brokerage firm helps you improve your offerings and gain access to a liquid market with a better spread and competitive rates.

Finding the best liquidity provider means providing multi-asset liquidity and accessing many tradable assets and instruments, enabling brokers to expand their trading infrastructure and attract more investors and traders. Therefore, retail brokers can offer buyers and sellers different instruments to encourage trading, increasing the market’s liquidity and efficiency.

Choosing an LP compliant with regulatory frameworks promotes retail brokers’ reliability and reputation. Financial regulations strictly regulate market makers, and any violation will receive hefty penalties, which affect retail clients, including brokers and investors. 

Therefore, to ensure your brokerage’s financial stability, find multiple LPs to distribute your portfolio and ensure they are fully compliant with regulatory requirements.

B2Prime, the world’s leading liquidity provider for financial brokers, has added FSC Mauritius to its regulatory portfolio, expanding its offering to more clients outside the EU zone. B2Prime’s clients can now trade +200 financial assets with highly competitive spreads and using several distribution channels, including famous trading platforms and automated trading software.

Look at the pricing policy of the LP and make sure you only choose those with suitable pricing for their services or if they offer a package of services. The best way is to directly contact several market makers providing liquidity, compare between them, and choose the most appropriate one.

Ensure they make reasonable promises. The markets are dynamic and ever-changing, and no single market maker could guarantee prices or currency pair stability, especially in the Forex world, where currencies change daily. However, you can identify the best liquidity providers who promise stability over the spread range or the volume quota they can offer you.

Verify the LP's reputation and experience before engaging their services since dealing with these establishments requires knowledge of and access to a certain set of banks, funders, and other financial institutions. A high-class LP may benefit you from the network of connections that feed them market data releases as they happen, and brokers can use this knowledge in fundamental analysis and providing news updates to their traders and clients.

You can also check their experience from their past activity and historical market data and if they have stable and reliable feeds to markets that your brokerage firms can benefit from.

In a well-liquidated market, there's no shortage of assets, and the spreads are minimised, favouring both brokers and investors. Nevertheless, it's imperative to partner with an LP overseen by a top-tier financial regulator to guarantee peace of mind and ensure consistent trading service to your clients.