The purpose of the relationship between FX brokers and their liquidity providers is primarily for the latter to understand the broker’s business and how the two parties can work together. This can be understanding the profile of flow the broker sends so that the liquidity provider can tailor their liquidity offering accordingly and determine whether there are other opportunities to work together. The liquidity provider can also deliver feedback on where the relationship is and isn’t working and where it could be improved so that in time it can improve its offering, which in turn strengthens the offering a broker can provide.
“Human interaction between brokers and LPs is of paramount importance,” says James Gavin, head of trading Europe at iSAM Securities. “With so much of the business as usual being electronic, close interaction on how technology-driven operations are evolving is key. The relationship between LPs and brokers is geared towards informing their respective technology driven offerings to maximise the success of the relationship,” he says.
“The relationship between LPs and brokers is geared towards informing their respective technology driven offerings to maximise the success of the relationship.”
James Gavin
Traditionally, the relationship between brokers and liquidity providers was largely transactional. Liquidity providers streamed prices, brokers passed them on and spreads were the primary commercial lever.
A more strategic partnership
But that model has evolved. Now the relationship is more strategic, with brokers actively managing their downstream flow and aligning client types with the right liquidity providers to ensure flow quality. In return, liquidity providers offer more tailored pricing and improved execution.
This mutual alignment benefits both sides: brokers gain more competitive pricing and liquidity providers receive cleaner, more predictable flow explains Andrea Michael, director of institutional sales at StoneX Pro.
“Scale still matters – brokers need sufficient volume to aggregate meaningfully – but quality of flow is just as critical,” she says. “Occasional misalignments between client, broker and LP interests still arise but they are manageable with the right structure.”
The relationship between FX brokers and liquidity providers is commercially driven and mutually beneficial. Brokers depend on liquidity providers for deep liquidity, competitive pricing and reliable execution, enabling them to serve clients efficiently.
“Brokers now use advanced analytics and aggregation platforms to better understand their flow and match it with the most appropriate LPs.”
Andrea Michael
In return, liquidity providers benefit from steady client flow, which allows them to generate revenue through transaction cost analysis – capturing value from spreads, financing and commissions, while also supporting effective risk management through flow internalisation and portfolio balancing.
Paul Jackson, head of sales at Finalto observes that the shift to technology-driven liquidity provision has made interactions between brokers and liquidity providers more data-led and focused on performance.
“Brokers now use tools like TCA, smart order routing and real-time analytics to monitor LP performance and optimise execution,” he says. “At the same time, retail clients have become more sophisticated, often using automated trading models. This has increased the risk of toxic or predatory flow, which can damage relationships with LPs and negatively impact pricing.”
“While service should remain consistently high regardless of volume, increased volumes often lead to more advantageous commercial terms.”
Paul Jackson
Going with the flow
As a result, brokers can no longer rely solely on liquidity providers to manage flow quality. They must act as the first line of defence by implementing robust analytical and surveillance tools to protect their liquidity and maintain healthy execution conditions.
Liquidity provision in FX brokerage operations has evolved into a more complex and technology-driven operation. So how has this impacted brokers’ interaction with liquidity providers?
“Technology has transformed liquidity provision from a reactive process into a strategic, data-led discipline,” observes Michael. “Brokers now use advanced analytics and aggregation platforms to better understand their flow and match it with the most appropriate LPs. This has improved execution quality, pricing, and transparency.”
Internally, brokers are also working to consolidate FX risk across desks and business lines – a task that was once hindered by data silos.
With enterprise-level infrastructure this is becoming more achievable, says Michael. “Technology also helps brokers identify problematic flow before it reaches LPs, preserving pricing integrity and relationships. We have embraced this shift, leveraging outsourced technology and analytics to enhance our liquidity management and deepen collaboration with our Tier 1 LP network.”
Liquidity providers are central to the FX market’s structure. Their primary role is to quote two-way prices and absorb client flow, which supports price discovery and market stability, especially during periods of volatility.
Liquidity providers manage their own risk through internalisation, hedging and inventory control, tailoring pricing based on client type and flow quality. As the market has matured, they have become more sophisticated and now compete not just on price but also on responsiveness, technology and service.
As Michael notes, they offer customised streams for brokers, tighter spreads for institutional clients and execution certainty for corporates.
Market information highly valuable
One of the key functions of a liquidity provider in the FX market is providing a relevant liquidity offering to its client that is mutually beneficial. Keeping clients up to date on important market developments and informing them of their direction and how they can help their clients evolve is also important.
“As trading and business models evolve it is crucial to stay in close collaboration with LPs to ensure that the model is evolving in a beneficial manner to both parties,” says James Gavin. “As one changes a model it often will have downstream impacts on the LP and this is where an LP can work with the broker to help make this evolution a success for both parties.”
A higher number of touch points between a liquidity provider and broker deepens the relationship and allows the former to place a greater value on the business from the broker and offer a more competitive service.
“When a broker has a closer relationship with its LPs, it will receive a more competitive offering,” explains James Gavin. “This allows the brokerage to provide a more competitive offering in turn to its own clients and a better service.”
Collaboration between brokers and liquidity providers varies significantly depending on where the broker operates on the agency-to-principal spectrum. Agency brokers – who pass orders directly to liquidity providers – require high levels of transparency and flow segmentation. In this model, liquidity providers focus on pricing precision and stream customisation.
“Principal brokers, on the other hand, may warehouse risk and internalise flow, which introduces additional complexity,” says Michael. “Their collaboration with LPs often involves broader pricing agreements and deeper discussions around hedging and inventory management. LPs adjust their engagement accordingly, demanding detailed analytics from agency brokers and focusing on execution quality and risk alignment with principal desks.”
When asked to assess the benefits to brokers of forming closer, ‘one-stop-shop’ partnerships with liquidity providers in terms of access to capital, more competitive pricing and improved risk management, Michael observes that closer partnerships with liquidity providers offer brokers significant operational and commercial advantages.
“These relationships can provide access to credit lines, clearing, and customised liquidity, all through a single account,” she explains. “Brokers also benefit from access to multiple Tier 1 LPs and a wide range of currencies, which smaller firms may struggle to secure independently. Operationally, these partnerships reduce complexity.”
Outsourcing simplifies brokerage operations
Brokers can outsource liquidity curation, technology infrastructure and the management of multiple banking and prime broker relationships. This streamlines onboarding, simplifies reporting, and consolidates margin requirements, improving capital efficiency.
The benefit to clients when their broker adopts this approach is a more efficient, cost-effective trading experience.
“With a single relationship to manage, onboarding is faster and operational complexity is reduced,” says Michael. “Margin is held in one place, improving capital efficiency. Clients also gain access to deeper liquidity, tighter spreads and a broader range of currencies and asset classes – all through one platform. Execution quality improves as brokers can better curate liquidity and manage risk centrally.” She agrees that there is scope for liquidity providers and their FX brokerage clients to collaborate even more closely, an approach that has a number of implications for the FX market.
“There is still room for deeper collaboration between brokers and LPs, particularly in the areas of product development, liquidity customisation and technology integration,” she says. “As brokers become more sophisticated and LPs more agile, the opportunity to co-create solutions that serve both sides is growing.”
Technology will be the enabler, but it is not just about systems – it is about understanding. “Stronger personal relationships and clearer communication between brokers and LPs can unlock more tailored, responsive partnerships,” adds Michael. “This kind of collaboration could reshape the FX market, driving more efficient pricing, tighter spreads and smarter segmentation.”
If brokers have a close relationship with their liquidity provider, they can leverage the latter’s expertise in risk management
Bespoke collaborative approach required
The collaboration between brokers and their liquidity providers varies significantly depending on the trading and business model.
Dealing desk brokers don’t require consistent large scale liquidity but often need customised liquidity solutions to help manage and offset their risk. In contrast, brokers using STP or ECN models rely heavily on close, ongoing collaboration with liquidity providers, as liquidity provision is central to their operations.
“Many brokers operate hybrid models that combine elements of both approaches,” says Jackson. “Additionally, a broker’s model can evolve over time due to shifts in business strategy, market conditions or regulatory pressures. In these situations, it is crucial for the LP to support the broker’s ability to remain agile and adapt. This relationship is fundamentally a partnership built on trust.”
With a close, durable relationship in place, the liquidity provider is likely to be able to offer enhanced credit terms, as well as bespoke liquidity designed to match the broker’s business model and trading patterns, which ultimately can mean better pricing and tighter spreads.
“Indeed, while service should remain consistently high regardless of volume, increased volumes often lead to more advantageous commercial terms,” suggests Jackson. “This is mutually beneficial, helping both parties strategically plan with estimated costs and returns. It also reduces duplication of costs, such as overnight financing, margin funding or operational risk management across LPs.”
These are fundamental benefits. More broadly, a liquidity provider may be able to offer an integrated ‘one-stop-shop’ partnership giving brokers access to advanced risk management tools and services, rich market data and solutions needed for greater transparency and compliance.
When brokers adopt this kind of one-stop-shop approach with their liquidity providers, clients may benefit in different ways says Jackson.
“Sometimes it’s direct, tighter spreads and more reliable execution – in other cases, brokers will be able to pass cost saving efficiencies onto their clients. Access to a wider array of assets also benefits brokers and their clients. For brokers, this can help them stand out in a competitive market and for their clients, a richer and more flexible trading experience.”
Potential to get closer
When asked if there is scope for liquidity providers and their FX brokerage clients to collaborate even more closely – and how that would impact the FX market – Jackson reiterates that the broker’s relationship with its liquidity provider often depends on the former’s business model.
Beyond that, brokers also need greater awareness of the variety and flexibility of services available to them. Liquidity providers should work hard to articulate the value they bring, whether to established brokers or new businesses.
“Services such as white labelling, automation and tailored liquidity solutions can help brokers scale efficiently, diversify their strategies and manage rapid growth more efficiently and affordably,” says Jackson. “Brokers should also be encouraged to take advantage of the enormous intellectual capital that their LPs can offer.”
For instance, if brokers have a close relationship with their liquidity provider, they can leverage the latter’s expertise in risk management. This may take the form of information sharing or even working together to develop more resilient and suitable risk management strategies.
“At the same time, LPs need to be sensitive to the evolving needs of their clients,” he adds. “When I attend expos, I take the opportunity to listen closely to current and prospective clients. What challenges are they facing? What opportunities are they exploring? LPs need to be adaptable and responsive.”
James Gavin recommends liquidity providers and FX brokerage clients engage as a partnership with a limited number of liquidity providers.
“Brokerages require more than one LP to create an efficient pricing stack and reduce reliance on operational issues but keeping this set up selective empowers LPs to deliver an improved offering,” he concludes. “Only having a sole LP would require an incredibly stable set up and would be complex to achieve.”
