What Is a Liquidity Aggregator? A Guide for Modern Brokerages and Exchanges

Pavel Satsuk -

Introduction

Liquidity aggregators initially appeared in the foreign exchange (FX) market, which is decentralized and does not have a central exchange. It was created to combine price feeds from various liquidity sources. This enabled traders to compare prices, minimize slippage, and execute trades more efficiently.

What is a liquidity aggregator?

A liquidity aggregator is a platform that gathers liquidity from various sources to offer traders the most favorable prices for currency transactions. It consolidates different bids and asks quotes from multiple liquidity providers, including banks, financial institutions, and occasionally other traders, to ensure that traders receive the narrowest spread possible for a currency pair.

The Importance of liquidity aggregation for brokers and exchanges

Liquidity aggregation is an essential instrument for brokerage and exchanges, particularly in dynamic and fragmented markets like forex. Liquidity from various sources results in improved pricing, quicker execution, and enhanced market access, which will be discussed in detail below.

Quicker execution

Aggregated liquidity can enhance wider execution by directing orders to multiple liquidity sources at once, which boosts trading efficiency.

Improved pricing

More favorable pricing and lower transaction costs can occur as a result of gaining access to different markets and liquidity pools in one place.

Enhanced market access

Liquidity aggregation offers a clear view of the market while providing access to multiple markets through a single platform by showcasing prices and liquidity from various sources.

Enhanced market depth

Liquidity aggregation enhances market depth, traders are permitted to achieve better order fulfillment at larger volumes by combining various sources of liquidity.

Ways liquidity aggregator technology function

It functions by linking various liquidity providers, including banks, exchanges, Electronic Communication Networks (ECNs), and market makers.

1. Data connection and API integration

Liquidity aggregators utilize API connections to gather data from market makers, banks and exchanges. The brokerage platform receives real-time bid/ask prices, order books, and trading volumes through these connections.

The API layer is vital for facilitating trade execution across financial markets, utilizing webstock connections and FIX protocols to manage liquidity and routing rules more effectively.

2. Aggregation algorithm

When dealing with large orders, algorithms can divide them among several providers if no single source can fulfill the order effectively.

This capability allows the execution of trades at the lowest possible cost while maintaining speed and accuracy, enhancing the overall user experience. Algorithms play a crucial role in liquidity aggregation.

3. Order routing and execution

After the aggregation algorithm, it identifies the best price and employs smart order routing, considering factors like latency, provider response times, and order size. Large orders may be executed in parts across multiple liquidity providers to reduce slippage.This technology routes orders, it does not concern only price but also  the probability of quick and successful execution, even in volatile conditions.

Furthermore, Soft FX provides a comprehensive liquidity aggregator tailored for FX markets with features like aggregation from over 40 liquidity providers, real-time risk control, extensive market data, etc. Aggregators offer failover routing, which shifts to backup providers during outages or high latency periods.

Advantages of Soft-FX Liquidity aggregation

It offers several significant benefits for traders in modern brokerage and exchange operations. Soft-FX's advantage in liquidity aggregation stems from its capability to merge liquidity from different sources. Below are the benefits of Soft-FX liquidity aggregation.

1. Improved execution speed

Liquidity aggregation leads to faster execution and minimizes slippage by merging orders from different sources.

2. Broader market access

Aggregation enables trading in both highly liquid and less frequently traded assets, ensuring stable quotes even during periods of price volatility.

3. Risk management

Reliance on a single provider is lessened, thereby reducing potential risks associated with brokers by diversifying liquidity sources.

4. Improved pricing

Traders gain access to competitive prices through the aggregation of liquidity from multiple providers, which helps lower costs.

Soft-FX's TickTrader liquidity aggregator provides a competitive advantage through seamless integration, advanced technology, and strategic adaptability.

5. TickTrader trading platform

This platform connects directly to facilitate multi-asset trading, including FX, stocks, and metals.

Trader’s room with a liquidity aggregator oversees client accounts, handles deposits, manages KYC processes, and generates reports.

6. PAMM

It allocates trades across investor accounts. The aggregator guarantees optimal execution.

7.Matching Engine

It enables internal order matching, minimizing dependence on external liquidity providers.

Factors to consider for brokerage and exchange

Before implementing a liquidity aggregation for a brokerage or exchange, especially when using a solution like Soft-FX’s TickTrader liquidity aggregator, it is important to consider factors like compliance, costs, compatibility, and business continuity to ensure a smooth execution of trade. Below is a detailed explanation of the essential factors.

1. Infrastructure and compatibility

We provide an aggregator that seamlessly integrates with the TickTrader trading platform, providing easy access to FX, stocks, and CFDs. The trading platform integration should facilitate multi-asset execution and intelligent order routing.

Strong APIs are essential for real-time quote streaming. Matching engines should accommodate both internal and hybrid execution models. Integration with Trader’s Room is crucial for streamlined KYC processes, deposits, reporting, and liquidity access.

2. Risk management and compliance

Mechanisms should be in place to take out harmful trading activities, ensuring the quality of liquidity is maintained. The liquidity aggregator should involve features that avoid overlapping feeds that can lead to distorted pricing and execution. Market-making for synthetic symbols allows the creation of customized instruments while adhering to risk compliance protocols. Furthermore, the aggregator should include tools for regulatory reporting, trade history tracking, and execution analysis.

3.Cost efficiency and scalability

The use of services such as PAMM, copy trading, and asset expansion can be scaled as the business grows. Cost efficiency and scalability with soft-FX provide Nano-Lot external hedging, which reduces B-Book latency and enhances execution speed, thereby minimizing operational risks.

4.Business continuity

Aggregating liquidity from various providers guarantees uninterrupted trading during outages or marked volatility. There should be continuous system performance checks and alerts to ensure liquidity integrity and overall health.

How liquidity aggregator helps in risk management

Liquidity aggregator ensures stable pricing and order execution even during periods of high market volatility by managing risks. The optimization of market depth and the implementation of failover systems can assist you in minimizing operational risk and enhancing client confidence.

1. Reduction of spillage

Some providers also implement additional methods, such as price freezing and productive execution techniques, to reduce the difference between quoted and executed prices. Aggregators help decrease slippage through smart routing, which allows quick order matching at a better price.

2. Managing liquidity tiers

Risk management approach is to categorize liquidity providers into tiers based on their performance, reliability, and pricing.

3. Failover

Failover systems are created to identify latency and potential failures from primary liquidity providers, allowing rerouting of orders to backup providers. Maximum uptime and performance for your platform, particularly during periods of high volatility, are ensured.
Furthermore, Soft-FX’s matching engine and architecture provide exceptional trading performance with a matching engine designed for speed and efficiency, scalable architecture, low latency, and reliable order execution that lowers the chances of failed or delayed transactions.  

In conclusion, liquidity aggregators are crucial in modern brokerage and exchange activities, as they enhance trade execution by leveraging multiple liquidity sources.
Soft-FX is a leading provider of liquidity aggregation technology for digital asset trading platforms.

At Soft-FX, we provide advanced solutions that should be adopted by all brokers, digital asset exchanges, and proprietary firms seeking success in the financial market, as our high-tech software facilitates flawless trading in virtual currencies. Contact Soft-FX today to explore how our cutting-edge solutions can empower your business.

FAQ's

Q1: What is a liquidity aggregator?

A: A liquidity aggregator is a technological platform that gathers and merges liquidity from various sources.

Q2: How does Soft-FX’s liquidity aggregator integrate with my system?

A: Soft-FX’s TickTrader liquidity connects with your brokerage or exchange using APIs (FIX, REST, WebSocket), and matching engine.

Q3: Can this solution support high volumes and scale globally?

A: Yes, Soft-FX’s TickTrader liquidity aggregator is tailored to facilitate high volumes trading and global scalability, making it perfect for brokerages and exchanges.