Trading in financial markets has become a real gold rush of our time, offering great opportunities to increase capital as well as to create a successful forex, crypto, or any other type of business associated with trading in financial instruments. Such complicated and complex infrastructure as trading combines a lot of distinct systems and programs, providing a smooth process of order creation, placement, and execution. To enable transactions, there is a system that connects suppliers of liquidity and traders through a trading platform and it is called a liquidity bridge.
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What is a Liquidity Bridge, and How Does it Work?
Liquidity bridge is the software that gives traders straight access to the international banking market through an electronic trading platform similar to MetaTrader 5. This platform is designed to organize trading between a broker and a client and does not provide for direct transmission of orders from a trader to providers of market liquidity, such as large brokers, banks, and other financial structures. The liquidity bridge allows traders to receive quotes and liquidity without the significant involvement of the broker through end-to-end processing technology. On the one hand, it provides a better quality of trade, and on the other hand, it reduces the risks of the brokerage company. There are two types of liquidity bridges, corresponding to technologies ECN and STP.
- ECN Liquidity Bridge
ECN liquidity bridges allow to unite clients (traders and financial entities) from completely distinct parts of the world, which noticeably increases total turnover, allows round-the-clock trading, and also increases liquidity, ultimately having a favorable effect on execution speed and spread. This system, where an order from each trader (not just from market makers) is put on the market, is very progressive because of the growing popularity of trading among private traders and because of the increased transparency. It is worth noting here that transparency refers to transaction volume and price, not the name of the counterparty. Formally, the counterparty for all trades is the ECN system.
ECN network also is considered an alternative trading system because it does not use market makers from the exchange or OTC market.
- STP Liquidity Bridge
STP (Straight Through Processing) is a liquidity bridge that allows brokerages to send clients’ orders for execution straight to the liquidity provider organizations – banks, which trade directly on the interbank market. The more companies providing liquidity there is the better execution for the clients. The fact that traders have straightforward access to the real market and the possibility of instant execution without the participation of a dealer makes this system extremely attractive to most traders.
The main feature of the STP liquidity bridge is the direct connection between the client and the liquidity provider. As a rule, the provider aggregates multiple liquidity sources, resulting in increased liquidity and better prices. The STP system offers a choice of floating or fixed spreads. While the main liquidity providers are the large banks, which provide a fixed spread, the aggregator can choose the best prices among all the sell and buy offers. This can sometimes lead to zero or even a negative spread.
Why does Liquidity Bridge Have an Important Role In the Trading Process?
Regardless of the type of liquidity bridge, this system plays an essential role in providing liquidity on the trading floor. Moreover, the liquidity bridge provides brokers with certain benefits and advantages.
For example, the ECN liquidity bridge (system) allows direct trades between clients. In fact, the broker, in this case, provides a platform where banks, market-makers, and private traders can make transactions with one another directly, which sometimes makes it possible to make transactions at a better price than when using external counterparties. Moreover, it allows getting rid of trading delays, which, with sufficient liquidity, gives practically perfect execution.
As a result of the use of an STP liquidity bridge, there are no human errors, delays, or costs associated with transactions, since traders do not have to worry about other people interfering with their trading activity. Additionally, an STP liquidity bridge facilitates greater liquidity, since prices are purchased from a variety of market participants, as opposed to merely one liquidity supplier. Comparatively, when a brokerage company has only one source for its quotes, it is not able to provide better execution, tighter dealing spreads, or more accurate quotes.
How to Get Connected to Liquidity Bridge?
STP is a system that is considered one of the variants of the execution of orders under the NDD system and implies end-to-end processing of transactions with partial automation. All quotes are provided by liquidity suppliers, of which there may be several (the more, the better). The order created by the client goes to the connected liquidity provider via straightforward access to the market and, from there, to the partner banks. Some liquidity providers work with most of the largest banks in the world, such as JPMorgan Chase & Co, Deutsche Bank, and Morgan Stanley.
Execution according to the STP system differs from ECN in that, in the first case the broker has an opportunity to choose more favorable conditions of transaction among various liquidity suppliers; with ECN – everything happens automatically. Using the STP system, the company is not interested in losses of clients’ deposits, and it is more important for the trader to make transactions as the broker earns only on spreads and fees. The company is interested in more clients, larger amounts of deals, and the safety of deposits. No funds for the client – no income. Available trading platforms for opening accounts on this system: cTrader, MetaTrader 4 (MT4), MetaTrader 5 (MT5).
In order to connect to one of the above-mentioned liquidity bridges, brokers use distinct services that provide services to connect the necessary infrastructure so that the broker could use different sources of liquidity, such as large banks or companies specializing in providing liquidity and related technologies. The connection process is carried out by implementing the infrastructure of the stock exchange’s appropriate software to communicate with the company offering the service. Once connected, the broker company can have a number of liquidity sources to ensure smooth trading with minimum spreads.
Conclusion
Liquidity is the main driving force of any financial market and is an integral part of the trading process. The presence of a stable liquidity bridge, as well as a reliable liquidity provider is the key to a successful broker business. With the development of technologies, the emergence of new systems to provide liquidity from organizations to brokerage houses is expected, which will undoubtedly increase the speed, quality, and efficiency of both individual processes by the example of order placement and trade in general.
