The Chase for Liquidity in the Decentralized Forex Market
Liquidity is especially important in all financial markets. The Foreign Exchange market is an OTC (Over-The-Counter) financial market that operates as a vast decentralized network. In this market, many different providers offer the same exchange rate, and there is no single quote at any given time. As a result, quotes for the same currency pair can vary, making the pursuit of high liquidity even more essential.
Liquidity Aggregation
Liquidity aggregation involves gathering orders from multiple sources and routing them to a large executing entity.
A retail aggregator combines small retail trades into larger orders that can be filled by a major market participant. These larger participants have direct access to the extensive liquidity of the ECN network. Retail aggregation benefits every market participant by:
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Providing access to the best possible spreads at any time
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Enabling trading with minimal slippage on order execution, especially during news releases
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Facilitating the easy execution of large order sizes
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Continuously diversifying order execution risks by using several liquidity sources
Forex brokers can act as retail aggregators, filling their clients’ orders at the best bid-ask prices at the top of the book. Brokers use electronic aggregation services to access sufficient liquidity. The software that combines liquidity from different providers into a single venue is called a Foreign Exchange Aggregator, or FX Aggregator.
