How Do Regulated Liquidity Providers Make Money?

For successful trading, it is essential to have the support of a regulated liquidity provider (LP). These regulated brokerages are usually 100% STP (Straight-Through-Processing) or ECN brokers, who route trade orders directly to the market, without any third-party intervention.

Large STP forex brokers and prime brokerages deal with tier-1 liquidity providers and are able to offer the tightest spreads to their clients, since their access to currency prices are at a much higher wholesale level. These tier-1 liquidity providers are usually large investment banks or hedge funds, and retail traders cannot access them directly, since such organizations look for very high trade volumes.

Being a regulated and licensed liquidity provider means that the broker is a true STP/ECN broker, who won’t manipulate your trades or trade against you. Then how do they make money? Are the spreads and swaps enough for them, or do they have additional sources of income? Can they start trading against you like market makers? Let’s find out.

Regulated Liquidity Providers Make Greater Profits.

Like any market maker, regulated liquidity providers lose money when you make a profit, but this doesn’t drive them to trade against you. This is because they have a large number of investment activities to cover such small losses. Such providers support experienced professional traders and institutional investors, who work for big banks and hedge funds.

Their positions are much larger than retail traders, which means that their mode of making profits, whether through commissions per trade or by applying a markup to the price feed or even a combination of both, generates higher income.

So, even if your trades are generating losses for them, they will appreciate your association with them. In some cases, the money you invest with them gets added to their treasury, allowing them to lend money to big investors, banks and even government bodies. This earns them a considerable income.

Your money helps them carry out all the necessary activities required to manage your trades efficiently. They handle millions of transactions 24/7, even during weekends, when retail traders cannot trade in the currency markets or exchanges.

In short, they won’t go against you, simply because they don’t need to. Rather, they have other concerns, such as intense competition in the market, the changing regulatory landscape, advent of superior technologies every year and other factors that push them to offer better services to clients.

Market reputation is of utmost importance to them, which, if lost, can seriously hurt the business of major liquidity providers. Moreover, the government keeps a close eye on their activities, which is why they ensure complete transparency and compliance with guidelines.

The Relationship between Liquidity Providers and True STP Brokers.

STP brokers gain access to quotes and the means to provide high-speed executions for clients through their relationships with top players in the inter-bank market. By marking up the rates provided by the liquidity providers, brokers earn a small part of the revenue for each trade executed by their clients.

In case of commissions charged on a per-trade basis, the commission is normally agreed upon by the broker and liquidity providers prior to the commencement of trading. Such commissions are nothing but clearing fees charged by LPs to brokers. So, whereas brokers are interested in low fees, liquidity providers are interested in high trade volumes.

Commissions are the only legitimate way for regulated brokers to make money, and they have no reason to cause losses for their clients.

When traders choose to buy or sell a currency pair, the order is routed to the liquidity provider offering the best price or the one closest to that on the broker’s platform. Here, the liquidity providers don’t have any knowledge of the trader or the pending orders. For them, the broker is the trader. Also, a major portion of the orders routed to them are losing orders, so they don’t have any reason to prevent winning trades. Orders are distributed uniformly across several liquidity providers, so they have an equal proportion of winning and losing trades.

So, what’s the final verdict? LPs gain a lot even from losing positions which is why true-STP brokers don’t have any incentive to trade against their clients. Speak with us for a customised solution.