What is a Liquidity Aggregator in Forex?

Forex exchange is known globally as the biggest and the most gainful market in the world. Due to its global nature, vast variety of currency pairs that allows investors choose the most liquid assets, and high volatility which leads to high liquidity this market keeps its leading positions among traders worldwide. 

In this article we will talk about liquidity, how it is formed in FX, and dive deep in the concept of Liquidity Providers and Liquidity Aggregators. Let’s start! 

Liquidity in Forex

Liquidity is one of the core parameters in the FX market. In broad terms, it is defined as the ability of an asset to be bought or sold at market price. 

Commonly, assets can be grouped into two categories: liquid assets and nonliquid (or illiquid) assets.

Liquid assets are assets that can be quickly and at minimum expense converted into cash. 

Currency is considered the most liquid assets of all the existing assets. Since Forex trades currency pairs, it becomes absolutely clear why this market is so profitable. 

Illiquid assets, on the other hand, cannot be converted into cash within a short time period and can significantly lose their value in the long run. These are, for example, real estate properties, cars, rarities, or precious coins.

Liquidity in FX is one of the central parameters since it ensures the lower risk of slippage, quick order execution and narrower bid/ask spread.

It allows for ease of trade and makes the market popular among traders.

Who Forms the Forex Liquidity

Liquidity in Forex does not come from nowhere. 

Various finance institutions, banks and huge brokers act as counterparties ready to buy or sell the required amount of currency in FX. These counterparties are called liquidity providers, and they are responsible for liquidity formation in the market.

Each client’s buy request should be matched with the same request of a seller, that is, for a successful order, the requested volume and price from the buy side should be matched with the same volume and price from the sell side. That is why we need brokers — intermediaries between a trader and a financial market.

But without LPs, it would be impossible for brokers to match so many orders and fulfill all their clients requests.  LPs offer more favorable trading conditions due to the existing large volumes of supply and demand.

In simple words, liquidity providers can be compared to wholesale suppliers, who supply liquidity instead of the actual goods.

What is Liquidity Aggregators and How They Differ from Liquidity Providers

Liquidity providers are not the only source of liquidity in Forex.

Beside liquidity providers, the current market can offer another form of access to foreign exchange liquidity — aggregators of liquidity. Let’s define the difference between these two concepts.

Liquidity providers execute orders of brokers who are bound with LPs by direct agreement. These are mostly big international banks or other large finance institutions.

Liquidity aggregators, on the other hand, are computer algorithms that allow traders to simultaneously obtain streamed prices from multiple liquidity providers or liquidity pools.

In fact, LA is a software that enables you to choose the best asset price among the prices provided by LPs.

The liquidity aggregator can be either a broker itself or a separate organization.

Among the largest LAs in the market we can name such as smartTrade LiquidityFX, Liquid-X, FlexTrade, Quotix, Integral, Seamless FX, Currenex, and many others.

How Liquidity Aggregators Work

Aggregators are distinguished by the principle of their operation. There are two main emerging platforms on the market right now: ECN and MTF.

The Electronic Communication Network (ECN) combines the liquidity of many providers which contributes to better prices and tighter spreads. The trader’s order is routed directly to the order book where it is mingled with all other orders. The spread is determined by the market demand and supply, and the broker receives the revenue in the form of commission on the trading volume.

ECN technology adds to the protection of a trader against manipulations as well as it guarantees brokers’ noninterference.  

Multilateral Trading Facility (MTF) has a centralized order book, which can be used by both banks and ordinary traders. No transaction confirmation by a counterparty is required, so this means that the order execution at the set price is guaranteed. With MTF, traders have almost the same rights as banks, because all the orders are matching in one order book.  

Conclusion

Liquidity aggregation brings a lot of benefits to traders and transforms traders’ interaction with the market. 

LAs help to create a deeper market and increase the level of  liquidity by collecting numerous sources of liquidity in one place. They also provide faster order executions by sending orders to various liquidity sources simultaneously. 

Another beneficial point is the market's transparency: aggregators display prices and liquidity from multiple sources contributing to a more transparent market view.

LAs can be very beneficial for the Forex market. They allow trading with lower cost which reduces barriers for participants in the market. LAs also contribute to better outlook on the market and fast execution of orders which leads to increased trading performance.