The foreign currency market doesn’t have a central place and is split up into different parts. Although around 3 trillion currency is traded in the spot, forward and swap foreign exchange markets every day, there’s still a big issue concerning the lack of transparent price discovery and liquidity as there are many institutional Forex platforms. However, new and better trading options are being introduced, and with the increasing numbers of online foreign exchange traders, liquidity can now be sourced from various places.
Since liquidity has always been spread out because of the decentralized, fragmented, and over-the-counter nature of the Forex market, Forex Liquidity Aggregators were developed to give market participants a quick view of every source of liquidity in one place. Here are some of the advantages of Forex Aggregators:
A Virtual Forex Exchange
A Liquidity Aggregator acts as a trading portal by gathering data from various sources and feeding it into algorithmic engines. Aggregated data is used to receive and funnel trading orders into the market. By consolidating liquidity into one comprehensive order book, Forex Aggregators turn out to be a “Virtual Forex Exchange” for buy-side traders. Traders gain a complete picture of all liquidity in one place, which helps them maintain maximum control over their order flow by evaluating and making profitable decisions.
Reducing Transaction Costs
Forex Aggregators bring the market back by integrating multiple sources of liquidity for buy-side traders. This functionality not only reduces transaction costs but also saves time spent looking for liquidity. Aggregators limit potential risks by placing all execution orders in one order book. The cost of aggregation services can be offset because traders spend less time looking for the best price.
Enhancing Trading Efficiency
With Forex Aggregators, traders no longer need multiple desktop portals. Aggregation tools bring together functionality, pricing, and liquidity in one portal. Traders can save funds by reducing the need to employ infrastructure and staff to manage multiple portal connections with traditional execution systems. One significant problem faced by traders utilizing traditional execution systems is “last look provision.” Bank portals have a waiting period of between several hundred milliseconds to several seconds before the deal is executed. This delay in seconds can have a significant effect on profitability, especially for algorithmic trading systems. By aggregating liquidity sources, the last look provision can be reduced, thus increasing trading efficiency.
Better Price Discovery
Forex Aggregators include an internal matching system that matches trading orders between all buy-side traders and liquidity providers, leading to better price discovery and more significant liquidity. This, in turn, improves the response time and order confirmations for the users.
Maintaining Anonymity
Buy-side firms prefer anonymity when trading on the Forex marketplace as they don’t want to reveal their trading strategies. Forex Aggregators allow them to execute transactions without revealing their position or identity.
Smart Order Routing
Forex Aggregators enable “smart order routing,” allowing traders to monitor all liquidity sources continuously to determine the best opportunities in the market. After an order is executed, the Aggregator automatically decides where to route, how much of the total amount to send to which venue and what orders to send. Users can refer to only one screen instead of referring to several different portals, thus saving the cost of employing systems for each trading venue. This technology delivers efficiency gains and enables more trading value to be retained by market players. Forex players are increasingly providing services that give a single point of access to market liquidity, along with a common trading record.