It’s no exaggeration to say that today’s financial markets are a veritable gold rush, flush with opportunities to build wealth and prosper through exchanging currency, digital currency, or any other financial instrument.
To facilitate the formulation, placement, and execution of orders in a streamlined manner, the trading infrastructure must integrate various separate systems and applications. And here comes liquidity bridge, the term which refers to the system that links liquidity providers with traders via an online exchange.
Understanding Liquidity Bridge
Liquidity bridge is a program that connects users of electronic trading platforms like MetaTrader 5 to the global banking industry. This system is meant to facilitate transactions between a broker and a client; orders placed by traders are not transmitted directly to market liquidity providers like large brokers, banks, or other financial institutions.
Using end-to-end processing technology, the liquidity bridge ensures that traders always have access to quotations and liquidity without relying heavily on the broker. As a plus, it improves the overall quality of deals while simultaneously lowering the brokerage’s exposure to risk. Liquidity bridges can be either STP or ECN based on the underlying technology.
STP Liquidity Bridge
STP (Straight Through Processing) acts as a bridge between brokerages and the liquidity providers, typically banks that trade directly on the interbank market, to facilitate the execution of clients’ orders. The higher the quality of client execution, the more liquidity providers there should be. Most traders find this system very appealing because of the ease with which they may access the actual market and the potential of immediate execution without the intervention of a dealer.
STP liquidity bridges primarily differentiate themselves by facilitating a one-to-one relationship between the client and the liquidity provider. In most cases, the supplier will aggregate liquidity from numerous sources, leading to higher liquidity and better pricing. Spreads can either be variable or fixed in the STP system.
Large banks are the primary liquidity providers; they give a set spread, but the aggregator has the freedom to select the most favorable spread from among all the sale and purchase bids. Because of this, the spread may be zero or even negative.
ECN Liquidity Bridge
By bringing together customers (traders and financial institutions) located in different regions of the world, ECN liquidity bridges significantly enhance turnover, make trading possible around the clock, and boost liquidity, all of which positively impact execution speed and spread.
Given the rising popularity of trading among individual traders and the greater transparency, a system in which an order from each trader (and not just from market makers) is put on the market is very advanced. It’s important to note that in this context, “transparency” refers to the transaction volume and price rather than the counterparty’s identity. By definition, the ECN system acts as the counterparty in all transactions.
Since the ECN network does not rely on exchange or OTC market makers, it is also classified as an alternative trading system.
Importance of Liquidity Bridge Trading Process
No matter what kind of liquidity bridge is in place, this system is crucial to the smooth operation of the trading floor. The liquidity bridge also offers advantages and benefits to brokers.
For instance, the ECN liquidity bridge (system) enables direct client transactions. In this situation, the broker acts as a conduit for transactions between banks, market-makers, and private traders, eliminating the need for third-party counterparties and potentially resulting in more favorable pricing for all parties involved. Also, trading delays can be eliminated, leading to near-perfect execution if there is enough liquidity.
Meanwhile, traders don’t have to worry about other individuals interfering with their trades when using an STP liquidity bridge. Therefore, they have no human errors, delays, or expenses.
By allowing prices to be acquired from multiple market participants rather than just one, an STP liquidity bridge allows for increased liquidity. In other words, a brokerage firm that relies on just one quotation source cannot compete with those with access to multiple quote sources and hence offer tighter dealing spreads and more precise prices.
Connecting to Liquidity Bridge
STP is a system considered one of the versions of order execution under the NDD system; it entails end-to-end transaction processing with partial automation. There could be many liquidity sources that supply the quotes (the more, the better). The client-generated order is transmitted to the linked liquidity provider via direct market access and then to the participating banks. Regarding the world’s major financial institutions, certain liquidity providers have partnerships with JPMorgan Chase & Co, Deutsche Bank, and Morgan Stanley.
A key distinction between STP and ECN execution is that in the former, the broker can select the most attractive transaction terms from among many liquidity providers. At the same time, in the latter, everything is handled automatically. Since the STP broker makes money exclusively on spreads and fees, losing clients’ deposits is not in the company’s interest, so, the trader’s ability to complete deals is prioritized. This means that the company’s priorities are expanding its client base, increasing its transaction volume, and protecting its customers’ money, because there is no profit without the client’s payment. cTrader, MetaTrader 4 (MT4), and MetaTrader 5 (MT5) are some available trading platforms for opening accounts on this system.
Brokers utilize specialized services that link them to liquidity bridges, allowing them to access funds from institutions like large banks and other firms that focus on providing liquidity and related technology. The connecting process is carried out by integrating the necessary software for communication with the service provider into the stock exchange’s infrastructure. Once linked, the brokerage firm can tap into many liquidity providers, allowing seamless trading with tight spreads.
Liquidity is the lifeblood of the trading process and a crucial component of every financial market. Success in the broker industry requires a robust liquidity bridge and a reputable liquidity provider. New ways to offer liquidity from organizations to brokerage houses are likely to emerge with the development of technology, which will surely boost the speed, quality, and efficiency of both specific procedures, such as the placement of orders and the trade as a whole.