A Look Into the Liquidity Book: A Broker’s Perspective

Liquidity Tips for Brokers Liquidity Providers (LPs) are essential in a brokerage setup. Their main role is to supply the necessary liquidity, which allows brokers to facilitate their traders’ orders in the market. This means that liquidity providers ensure there are enough resources, like various products and volume, available for brokers to execute trades on behalf of their clients efficiently. Essentially, they help maintain a smooth trading environment by ensuring orders can be filled quickly and effectively.

Liquidity Book

In our last blog article, we mentioned that the Depth of the Market can be one of the factors that lead to orders being executed at different prices. Here we will have a closer look at the available liquidity book from an LP and how it will affect the outcome of an execution.

Each LP has their own unique Liquidity Book. It consists of multiple layers of buy and sell prices with varying prices and volumes. The best available price in the liquidity book, also known as Top of Book (TOB) price, often holds a limited amount of liquidity. It’s usually the first price that traders see, but it may not be sufficient for larger orders.

Example: executing a 2 million EURUSD order

As an example, if an EURUSD order of 2 million was sent to the broker, the order will be executed based on the available liquidity shown above, as detailed below

1.07368 x 1 million

1.07367 x 1 million

However, since only 1 price can be displayed from the trading platform, the trading platform will be displaying the Volume-Weighted Average Price (VWAP).

VWAP Formula:

By applying the formula, we arrive at the Volume Weighted Average Price (VWAP):

VWAP = 2,147,350/2,000,000 = 1.073675

Why Do Traders Experience Partial Fill or Rejection?

When traders place large orders that exceed the available liquidity, they may face partial fills or rejections due to insufficient liquidity:

Partial Fill: If the liquidity book only has 3 million in volume but the order size is 5 million, there is not enough liquidity to fulfill the order. This is one reason why orders may be partially filled.

Order Rejection: There are times when the order reaches the broker’s liquidity provider(s), but at the moment of execution, the liquidity provider has run out of liquidity because they are also executing orders from other traders. This can lead to order rejections.

Key Takeaways for Brokers and Prop-Trading Firms

To enhance order execution quality and market competitiveness, brokers and proprietary (prop) trading firms can benefit by:

Partnering with liquidity providers that offer deep liquidity pools.

Leveraging advanced connectivity solutions, like Centroid Bridge, to minimize latency and access multiple order book layers. Find out more from our blog article: Things to consider when choosing a MT5 hosting provider.

Ability to view and execute orders based on the available liquidity book enables VWAP executions. For brokers and prop firms who are warehousing their orders, this is the best way to offer your retail traders real-market trading experience.

For more information on enhancing liquidity and connectivity solutions, reach out to Centroid Solutions at .