Forex
What is liquidity aggregation and how does it make the market cleaner?
One of the important processes in the forex market is liquidity aggregation. Let’s review what it is, its key tasks and discuss market manipulation when no aggregation options are available.
What is liquidity aggregation in brief
Liquidity aggregation is a process that enables forex brokers to access liquidity from multiple sources, including banks, market makers, and other liquidity providers, and consolidate it into a single pool. This allows brokers to offer their clients better pricing, tighter spreads, and faster execution speeds. The better liquidity aggregation the broker has, the more profitable his business is.
Liquidity aggregation typically involves using a technology platform that can connect to multiple liquidity providers and consolidate their prices into a single feed. This feed is then used to execute client trades, with the broker selecting the best available price at any given moment. The platform may also include risk management tools to help brokers manage their exposure and ensure they have sufficient funds to cover client trades.
Key tasks of liquidity aggregation
- Consolidating liquidity. The primary task of liquidity aggregation is to consolidate liquidity from multiple sources such as banks, ECNs (Electronic Communication Networks), and other liquidity providers into a single pool. This allows traders to access a large number of liquidity providers through a single platform.
- Better pricing. By accessing multiple liquidity providers, brokers can offer their clients more competitive pricing, with tighter spreads and lower commissions.
- Faster execution. Liquidity aggregation allows forex brokers to access faster execution speeds, reducing the likelihood of slippage and ensuring client orders are filled at the best available price.
- Increased liquidity. Liquidity aggregation allows forex brokers to access deeper liquidity pools, reducing the risk of order rejection and ensuring that clients can execute trades even in volatile market conditions.
- Improved risk management. By consolidating liquidity from multiple sources, brokerages can manage their exposure more effectively, reducing the risk of significant losses.
- Reporting and analysis. Liquidity aggregation platforms provide detailed reporting and analysis tools to help traders monitor their performance, track their trades, and identify opportunities for improvement.
Overall, liquidity aggregation is an important tool for forex brokers, enabling them to offer their clients better pricing and faster execution speeds, while also reducing their own exposure to risk.
How liquidity aggregation counters market manipulation?
Market manipulation refers to the practice of intentionally influencing the price of a financial instrument, typically by large traders or institutions, for their own gain. Examples of market manipulation include spoofing, where a trader places orders to create the appearance of demand or supply, and front-running, where a trader takes advantage of advance knowledge of a large order to profit from price movements.
Liquidity aggregation can help to counter market manipulation by providing brokers with access to multiple liquidity providers and a diverse range of prices. This makes it more difficult for large traders or institutions to manipulate the market, as their actions will have a smaller impact on the overall market price.
Liquidity aggregation also allows brokers to offer their clients a more transparent trading environment, with prices that reflect the actual market conditions. This can help to reduce the impact of market manipulation and prevent traders from being misled by false prices.
In addition, liquidity aggregation platforms typically include advanced risk management tools, which can help brokers to monitor for potential market manipulation and take steps to mitigate its impact. These tools may include real-time monitoring of order flow and price movements, as well as automated risk controls to prevent large orders from impacting the market.
Overall, liquidity aggregation is an important tool for countering market manipulation in the forex industry, as it allows brokers to access a diverse range of prices and offer their clients a more transparent and fair trading environment. By using liquidity aggregation, brokers can reduce their exposure to market manipulation and provide their clients with a higher level of protection.
Liquidity aggregation can help to make the forex market cleaner by increasing transparency, reducing the likelihood of price manipulation, and improving market efficiency. This can lead to a more trustworthy and reliable trading environment, which can benefit traders, brokers, and other market participants alike.
Solution providers aggregation products offerings
By using liquidity aggregator solutions, forex brokers can provide their clients with a more efficient and transparent trading environment, which can help to build trust and loyalty among their clients.
There are several reputed providers of liquidity aggregation solutions. The oldest and the most advanced products belong to oneZero and PrimeXM. Newer ones include Takeprofit Liquidity Hub and MarksMan from B2Brokers, which offer reliable basics with fewer features.
At the same time, all the solutions are quite different and the brokers should clearly recognize their needs to pick the best match.
The cost of liquidity aggregation can be broken down into two main components: fixed costs and variable costs. Fixed costs include items such as setup fees, monthly fees, and minimum usage fees, which are typically charged regardless of the trading volume. Variable costs, on the other hand, are based on the trading volume and may include fees such as commission per million traded or mark-up on the spread.
Some liquidity aggregator providers may offer customized pricing based on the specific needs and trading volume of the broker. Others may offer tiered pricing, where the cost per million traded decreases as the trading volume increases.
In addition to the direct costs of liquidity aggregation, there may also be indirect costs, such as the cost of implementing and maintaining the necessary technology infrastructure to connect to the liquidity aggregator and ensure smooth operation.
For example, oneZero offers a range of pricing models, including a pay-as-you-go model based on trading volume, as well as customized pricing based on the broker’s specific needs and trading volume.
For the pay-as-you-go model, oneZero charges a commission per million traded, with rates varying depending on the trading volume. For example, for trading volumes up to 100 million, the commission may be 20 USD per million traded, while for trading volumes over 1 billion, the commission may be 5 USD per million traded.
In addition to the commission per million traded, oneZero also charges a minimum usage fee of 1,000 USD per month, as well as setup fees and other fees for certain additional features and services.
Investing.com – The US dollar has gained strongly since the US presidential election in November, but these gains are unlikely to limit the hit that US customers are likely to face from tariffs, according to UBS.
At 08:25 ET (13:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 108.950, but was around 1.5% higher over the last month, and remained not far from the more than two-year high seen last week.
The theory is that a stronger dollar lowers US import prices, said analysts at UBS, in a note dated Jan. 17. Those lower prices would partially offset the tax payments US consumers must make to the US Treasury when buying imports.
If the US paid for the Chinese imports, then a stronger dollar would automatically reduce the amount of dollars paid (fewer dollars are exchanged to pay the renminbi price). However, the US pays for practically all its imports in dollars, so this does not happen.
If the dollar strengthens, the dollar price is unchanged, unless the exporter consciously chooses to lower the dollar price of the goods sold, UBS added.
An exporter to the US might deliberately lower dollar prices, as (in dollar terms) local currency costs are lower. But local currency costs are only a fraction of a manufacturer’s costs.
“A Chinese electronics manufacturer, importing chips (bought in dollars) and exporting computers to the US (in dollars), will probably keep their dollar prices stable—ignoring currency moves,” UBS added.
The US dollar strengthened against China’s renminbi in 2016 and 2018/19, and US import price inflation for products from China showed no noticeable break with earlier trends.
The preference seems to have been to reroute supply chains as a way of avoiding trade taxes.
Investing.com – The US dollar slumped Monday following a report that indicated that President-elect Donald Trump was set to delay imposing trade tariffs immediately upon his inauguration, an expectation which had boosted the US currency following his November election victory.
At 09:20 ET (14:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 1.1% lower to 108.020, having climbed to a more than two-year high last week.
The Wall Street Journal reported Monday that Trump is planning to issue a broad memorandum on his inauguration that directs federal agencies to study trade policies and evaluate US trade relationships with China and America’s continental neighbors—but stops short of imposing new tariffs on his first day in office.
The memo, which the WSJ has seen, suggests that debates are still ongoing within the incoming administration over how to deliver on Trump’s campaign trail promises for hefty tariffs on imports from trade rivals such as China.
The dollar has gained around 4% since the November presidential election as traders anticipated Trump’s policies will be inflationary, necessitating higher interest rates for a longer period.
“Financial markets are on tenterhooks to see what executive orders newly elected US President Donald Trump will enact on his first day,” said analysts at ING, in a note.
“FX markets are most interested in what he has to say about tariffs and what kind of pain the Oval Office plans to inflict on major trade partners.”
Bank of America (BofA) noted a significant increase in repo rates during the week of January 13 due to heightened liquidity demand triggered by tax payments and limited funding provided by the People’s Bank of China (PBoC).
The liquidity squeeze was most noticeable on January 16, the day following the tax payment deadline, with DR007 and R007 reaching 2.34% and 4.19%, respectively.
The PBoC maintained its stance on defending the exchange rate stability, resulting in the tightness of (RMB) liquidity being felt in the offshore market as well.
On January 9, the central bank announced it would issue RMB60 billion of 6-month bills in Hong Kong, a significant increase compared to previous issuances. The coupon rate of 3.4% was notably higher than the December issuance, reflecting the tightness of CNH liquidity and subdued demand from investors.
The December FX settlement balance by banks’ clients fell further to a deficit of US$10.5 billion, the first deficit reading since July 2024. A key change from the previous month was a sharp increase in USD demand for service trade. Reports also suggest that domestic importers have been actively purchasing USD via FX forward to hedge against tariffs risk in recent weeks, which has been exerting upward pressure on forward points.
On January 13, the PBoC increased the cross-border macroprudential parameter to 1.75 from 1.50. This move allows domestic corporations and Financial Institutions (FIs) to conduct more cross-border borrowing.
Given the widened interest rate gap between China and overseas, BofA believes this is more of a symbolic move by the PBoC to anchor market’s expectation on FX.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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