Why is a Single Prime-of-prime Provider Better Than Multiple Liquidity Providers?

One of the common challenges brokerage firms face is finding the best liquidity model for their software, which supplies their trading platform with tradeable securities and order books, and therefore, users.

Traditional LPs offer different forms of funding, while prime-of-prime liquidity providers deliver more customised services to mid-size companies and startups. What’s the difference between these two modes of financing, and which one is better for you? Let’s discover.

Why You Need Liquidity?

Let’s start by highlighting the key uses of non-bank liquidity providers and financial institutions when launching your trading brokerage firm.

• Connecting your platform with financial markets and funding sources.
• Increasing the number of tradeable securities and assets in your brokerage software.
• Increasing the execution speed by consolidating deep order books.
• Improving price stability and trading conditions at your platform.

After understanding the importance of liquidity management and LPs in broad terms, let’s introduce prime-of-prime liquidity companies.

Prime-of-prime Brokerage: Responsibilities & Services

PoPs are entities that consolidate multiple funding sources and top-notch financial institutions and break them down into smaller services that serve smaller brokerage firms.

These financial providers are more suitable for newly launched startups and brokers who want to improve their market presence and trading services. They allow brokers to access tier-1 financial institutions, banks and funding pools at reasonable rates.

Usually, accessing these channels would cost hundreds of thousands, making them highly expensive for trading firms with limited budgets and users. Therefore, PoPs are excellent for new entrants to access financial markets and offer solid brokerage services at the best trading conditions.

Traditional LPs: Elevated Services & Rates

LPs offer a wide range of financial services that suit tier-1 trading firms and brokers. Their offerings expand from providing market access to risk assessment, financial consultancy, asset management and more.

Multi-asset liquidity providers usually work with leading investment firms and brokerage houses, assisting thousands of accounts and managing significant capital.

However, a single LP is one source of liquidity, and connecting your brokerage platform with more than one LP means paying multiple financial partners, including multiple service fees, different liquidity volumes, and many accounts.

That’s why one prime-of-prime provider is usually preferred by brokers over connecting with many LPs, saving costs, increasing market accessibility and improving risk management.

Conclusion

Launching a brokerage firm entails finding the best liquidity sources for your software and choosing between one PoP or multiple LPs. Prime-of-primes are usually preferred by newly established trading platforms and brokers, while LPs are more suitable for large firms.

However, connecting with more than one liquidity source can result in multiplied fees, a larger workload and increased costs.