Liquidity depth of a broker

Hi:

I have been trading on and off both on demo and live for few months.
I have also tried several brokers and read a certain amount of articles.

Here I want to share a bit about my understanding on liquidity. (please correct me if I am wrong).
And I hope they are helpful to understand a bit more about the big picture.

In the end of this post, I also have 3 questions.
It would be helpful if anyone knows the answers.

---

The liquidity structure is:
Tier 1 liquidity providers (Banks/Large institutions like Cit, Deutsche, JPMorgan and etc) >
Liquidity pool (EBS / Currenex / FXCM pro(FXCM's self pool) / LMAX (also run as a broker) / FXall / Thomas Reuter etc.) >
Brokers (It can be a Prime Brokerage or a normal broker) >
Retailed traders

From tier-1 to liquidity pool, a bank might provide liquidity to different liquidity pools.
(with similar but different quotes and volume, and it is possible that many of them are overlapping).

From liquidity pool to brokers, the contract between them may effect the amount of liquidity the broker can access.
(ex: some might set up no-last look with that pool, some might not.)

From brokers to retailed traders, the liquidity should additionally include those traders with the same brokers.
(I am talking about ecn, and in a real ecn, everyone can provide liquidity even it is small amount.)


When it comes to liquidity providers, some brokers name liquidity pools (ex: FXOPEN), some names the tier-1 banks (ex: IC markets).

If the liquidity providers are named in liquidity pools, it is easier to estimate its liquidity depth.
BIS has reported some data/ numbers, and from that EBS has ~15% share of the global forex sport market, FXall has the similar size (~15%), Thomas Reuter has a bit less (~12%), Currenex has around 8%, and HotSpot has about 4%. These big 5 add up more than 50%, and the rest less than 50% are divided by 30 other smaller pools.

If the liquidity providers are named in Tier-1 banks, then it means little.
For example, CNX has the access to many big tier-1, but its market share is 8%.
*access to the liquidity of a bank doesn't necessarily mean it has access to all the liquidity of that bank.
*It might mean the access to some part (can be a big part or a small part) liquidity of the bank's total liquidity.
[Ask for confirmation] about this part, I am not 100% sure, but it makes sense to me. It would be helpful if anyone can comment on it.


During my research, I tried to ask the full list of liquidity pools, but brokers sometimes tell me many of the liquidity pools are not discloseable.
(Currenex / EBS / LMAX /Integral / SolidFX / HotSpot / FastMatch seems to be discloseable because they are listed on some brokers' webpage.)

ps,
IC markets claims they have access to more than 50 pools, but I didnt get the full list.
I only know they link to Currenex, Integral and Boston Prime.

ps,
LMAX claims to be an exchange, but there is a thread in DonnaForex saying this is debatable. According to my personal trading experience with them, it does show some sighs. I dont have solid evidences (my experience might be biased, if you like, please find more information and then share).
On the other hand, its liquidity pool depth seems not able to compete with some big pools.
As for its other aspects, I have no comment.

ps,
In order to get a deep liquidity, going for PB (such as LCG, Marex, Baxter, vCap, etc) seems to be an unavoidable way.
Some brokers (like FXOPEN and IC markets) may provide decent depth of liquidity, but it is difficult to estimate the actual numbers since they don't disclose many information.
*myfxbook provides the instant trading volume monitor, but it doesnt provide the total static number, it is still hard to tell.

--

After my thoughts sharing, here are my questions.

Q 1.
BIS report is good, but not complete. It only provides the market shares of few big liquidity pools.
Where can I find details about the market shares for smaller liquidity pools?
(by approaching liquidity pool straight? I doubt they will disclose it.)

Q 2.
Any comment on the "same" liquidity provider?
for example, bank A might provide liquidity to liquidity pool B and C.
So the sources are the same (from the same bank), but quotes/orders/amounts might be separated.
How do we know which quality is better, and which volume is higher?

Another way to ask (I am not sure if it is a totally different question, or they are pretty much the same, it depends on how banks distribute their liquidity)
Will liquidity itself overlap?
for example, bank A has an agreement to provide liquidity to liquidity pool B and C.
In this case, how does A distribute its liquidity to B and C?
does A divides its liquidity and then gives one part to B, another part to C.
OR, A provides its total liquidity to both B and C at the same time.
(the orders in that liquidity will be cleared when either B or C take it, depending on who is faster.)


Q 3.
I am also interested in interactivebrokers, they seems quite decent, but I havent got any reply from them (slow reply...).
Does anyone know what liquidity pool they link to?


--

Many thanks
Wjack

I think I missed 2 points: (My 3 questions still remain unanswered, so any comments are welcome!)

1.
Apart from ECN type liquidity (in my original post, I was talking about ECN type liquidity), DMA type can also access to deep liquidity if they have good LPs.
With DMA, there is no liquidity pool. The brokers collect liquidity directly provided by LPs (or we can say the broker create its own liquidity pool)

Interactive brokers mentions they have access to 13 major banks on their website, and it sounds they are DMA.
ThinkForex / IG mentions this as well.

I havent asked details from them for further confirmation.
It would be helpful if anyone comments on it (such as, are they real DMA? quality of their liquidity?).

2.
Banks > Liquidity pool > Broker's aggregator > retailed trader model is generally true in most cases (MT4 / MT5 / cTrader etc.)
And this is easier and user friendly way.

If one chooses to go with a Prime Brokerage broker (PB), the money is in PB account,
but the connection (data feed / order etc) are directly from/to liquidity pools (no bridge, no aggregator.)
With this option, trader needs to have
(1) Coding knowledge (to code in FIX and connect to liquidity pool)
(2) Capitals (PB has minimum deposit, which is normally over $20k)
(3) Other knowledge (like knowing FIX structure, liquidity pool infrastructure, how to choose liquidity pools etc.)

Many thanks
Wjack

Q1. BIS report is a good source but the market has moved on from that as there is lots missing

Q2. Banks have different streams for different flows .They price accordingly to the flow .

Q3. Cant comment on them

You will find certain LP's have strengths and weaknesses in ccy pairs.

Hi lasty, thank you for reply.

(1) so, except BIS, is there any other report which have solid data?

(2) that is also what I found out. And in this case, it is difficult for traders to tell which flow has a better quality
(since there is no data on that unless traders link to many and then do the statistic.)

Many thanks
Wjack

To touch on one of your points:


Because the FX market is so fragmented, i.e., there is not one dominant exchange, but rather many different venues as you have intelligently pointed out, banks must post prices across many venues. For example, lets say Bank of America is willing to sell $5mio EURUSD at 1.36540. They might post a offer for $5mio at 1.36540 on 10 venues, i.e. Hotspot, FXAll, EBS, Currenex, LMAX, etc. This means that the liquidity is available at all of those venues, regardless of their market share (assuming it is large enough to entice Bank of America to price into it in the first place) - however, if a trade on Hotspot hits that price first, and then 1 millisecon later a trader at EBS tries to hit that same price, depending on how the venue operates, the trade might get rejected, slipped, requoted, or the quote might be gone altogether.

This means if you added up all the liquidity BOFA is showing acorss those 5 venues, it would look like there is $25mio available (5 venues x $5mio) but really, there is only $5 mio of liquidity there, and it is going to be available to whoever can hit it first.

Hi ForexSooth:

So the liquidity is overlapping a lot.
I believe that happens for the last-look liquidity.

So I dont estimate the market share by adding up all the liquidity.
I think the market share in BIS report is the volume being executed, and this is a good estimation for the market share.

--
But how about no-last-look liquidity?
(I know some liquidity pool provides no-last-look liquidity)

For the no-last-look, if this liquidity show up in many venues, it has the latency issue.
It is possible that more than one trader hit on the same liquidity (but at different venue).
Then this will be a trouble.

So, I think it is more reasonable that a no-last-look liquidity doesn't work like that. (However, I am not 100% sure)

--
Many thanks
Wjack

Come on ... What is shown on retail broker's website doesn't mean anything. A lot of the brokers simply don't know who their liquidity providers are, because an aggregator like Integral or Boston technologies sold them a complete solution with MT4 and liquidity providing (and there are quite a few brokers who are just white labels of others, they don't handle all this). And for others, showing some nice logos of big banks or well known names is pretty nice, so why don't do it ? Doesn't mean actually they have any connection with them...

That was just for the introduction, but why would a retail trader ask himself questions about "liquidity" ??? Is your intention to open multi million trades all at once ? Up to 10 lots (even 50 lots) trades (that's 1 to 5 million), every broker out there will handle this without major problem.

What is the expected size of your account ? And what trade sizes are we talking about for you to ask yourself these questions ?

PS: Traders can only act as liquidity providers on real exchanges. Usually with brokers talking of being an "ECN", traders can only take liquidity, not provide any.
PS: Why would LMAX not be an exchange ? Where is the debate ?

Hi Mevo:

Thank you for the reply.

I have my reasons to pursue better liquidity, and I am looking at some prime brokerage now.
My trading strategy, capital and size are another issue, but I am sure liquidity is an issue for me.
So let us just focus on the main question.

As for the LMAX issue, if you are interested, you can read this thread http://www.donnaforex.com/forum/index.php?topic=5892.0
But they dont provide solid evidence, just some of their opinions.

Just talking about my personal experience.
I was trading with LMAX for a while, but then I met some situations that LMAX suspended the market (totally freeze the market for some certain instruments, so no more order, no matter any kind, is accepted). This can happen from time to time, and only continue for a very brief time. (so you can only find it if you use api to track it on a live account.).

In my opinion, a real exchange should always open up the market, and no matter what happen, the market shouldn't be suspended, because "exchanging" always brings commission income for the exchange, and an exchange risks zero in the market. But LMAX does suspend market, so I start suspecting it might not be a real exchange. (Again, I have no evidence, and I am just sharing my experience.)

I asked LMAX what is the reason they suspend market, and their response is very vague, something like " they have right to suspend market if they think the market has some certain conditions."

Many thanks
Wjack

Ok, you have your reasons ? If you don't want to explain more, I can't help you more. (You can PM me if you want)
If you want to place trades of hundreds of millions at the same time, open accounts at many different places, and take all the liquidity you can when you need it then ...Don't focus on one place alone in this case. But for the moment, your talk is just sounding as some newbie nonsens (maybe I'm wrong).

I was not aware of LMAX freezing the quotes and never experienced it. LMAX is an exchange. Liquidity providers are using that exchange with (supposedly) the same rights as you. Now if LMAX wants to please their LPs by freezing the exchange sometimes is another story... I 100% agree that they don't have to block trading in any way, even if the spread was to be huge (because LPs withdraw their orders)

I never saw any freezing in lmax, and i look at their quotes for most of the day. Maybe they are using MT4 or something.

Me neither, but seem on rare occasion (news) where they would have done it because the spread would have been greater than 20 pips according to what have been discussed at donnaforex.
I cannot confirm as I never saw it myself. Several people are complaining about it, and it seems real (according to what I read). They argue that it's against the whole spirit of lmax and I totally agree with that (if it's true)

Hi shrike:

May I ask what tool are you using to trade with LMAX?

It can be my case is a special case.
But I want to point out that I found LMAX freeze market in some extreme circumstance, which is not easy to spot it on.

The suspension was also very brief, so it cannot be tell by eyes.
I met the suspended market from LMAX when I was using their api.
At that time, I pushed the trading cycle to be less than 5 ms (tick-trade) combing with my strategy.

--
Following I provide another way to possibly find if LMAX suspend the market.
(1) Have your api tool or even FIX engine ready, to be able to cope with tick-to-trade within 5 ms (1 ms is even better if you can).
(2) Choose a specific news time, and then start placing some small amount market orders, and to track if these orders are all executed, or rejected.

I didnt try this (my strategy was another kind, and I have already closed my LMAX account.), so it is just a suggestion.

In theory,
if LMAX does suspend market, then it likely happens during news time, and can only be caught by very high speed tool.
if LMAX doesnt suspend market at all, the test above should be working totally smoothly (but I doubt it since I did meet market suspended.)

--
Overall, if your strategy is slow (time frame is large than 10 ms), then it doesnt matter to you at all.

--

Many thanks
Wjack

oh, some notice.

according to donna forex thread, people saw the suspended market, which could even be tell by eyes.
but in my case, I let me algo run, and I didnt measure/record how long the market was suspended in my case,

My assumption of high speed tool is from my experience, maybe you dont necessarily to have it to detect a suspended market.
I think it is still better to have it because some brief time of market suspended could still happen.
(Again, if your time frame is slow, then it doesnt matter to you at all.)

Many thanks
Wjack

There is a video on YouTube with LMAX CEO declaring that "news traders don't add value, I don't see any value in that", that "liquidity arbitrageurs don't add value" when he's asked what he thinks about news traders and HFTs.

There is another video in which he says "every day I talk to my LPs, and they say to me 'this was good flow, this was bad flow'".

And LPs don't follow the same rules as normal members on LMAX. Read their rule book and you'll see that "members don't match against each other, they only match against normal clients". Translation: the orders of two LPs can't cross. Why? Probably because the LPs offer better prices on LMAX (because retail flow is non-toxic), but they don't want other LPs to profit from these better prices.

I find this comments pretty funny. Is there any "value" in trading in the first place ? This "value" thing (globally) is probably an endless debate.
But it's also quite not understable: Profit for LMAX = commissions. The more trades, the more commissions. Where this trades come from and why they are placed is not LMAX problem (shouldn't be).

According to what I read on donnaforex, the problem seem to be the LPs which are not happy with this kind of trades. And LMAX need some LPs, so they need to try to please them so that they don't leave.

Well i never saw it, but people should read the trading manual, i suppose.

http://www.lmax.com/pdf/Trading-Manual.pdf

Page 3, untrusted and suspended markets. Its a take it or leave it thing, i suppose.

P.S.: yes, seems they dont like newstraders. What i would like to know, is it only API news traders, why try to beat the LP on speed and chase milliseconds, or if it affects point&click trading too.

Anyways, since i dont news trade, i will take this over last look liquidity any time.

I think another good point of using the millisecond tool is to track if your order is a no-re-quote thing.
This cannot be done on click trade or by eyes.

For example, you may place an order to a ECN (can be LMAX or anywhere),
then your order was matched with some liquidity,
if there is no re-quote, it should be done in few milliseconds (LMAX claims less than 5 ms, but I read some other ECN can do better.)
if it has requote, then the liquidity provider might "take its time", wait up to 200 ms, and then decide to reject you,
but this order can still circulate inside the ECN,
and then it will probably be matched with another liquidity.

In this case, it surely suffers some slippages.
As for the execution time, it can be slightly more than 200 ms,
still so quick that click trade or eyes cannot tell (but the requoted already happen.)

This thing can be tracked by using millisecond API.
So, it is an one way to protect yourself.
MT4 certainly cannot do it, so it has this risk.

Wjack.

1. I would take it as estimation only .. many institutions double count .. they will say a 1mio trade has a buyer and seller therefore claim it as 2 mio

2. its all trial and error and even within banking community the Aggregator writers are getting poached by other banks.

if you are going to go institutional you will need access to an ECN whereby you can bid and offer inside the spread and pay brokerage.

The ECN needs to be well pooled so you can get hit on your prices.

Regarding LMAX suspending markets, they have this concept of "trusted spread". Any time the spread is larger than the "trusted spread", the market is automatically suspended and no trading can be done. More interesting, you can't even cancel/modify order during the suspend time.

On their Professional venue, the trusted spread on EUR/USD is 18 pips.

Now I don't know if this is the actual reason for the suspensions reported here.