Brokerage firms are always on the lookout for a robust source for their financial offerings, an intermediate that provides them with the technical and legal capability to access trading markets and offer them to their clients.
Liquidity-providing companies connect brokers of different kinds to markets and tradable securities. Given the rapidly changing market dynamics, this model has become more prominent in the crypto landscape.
Crypto exchanges are always under the scrutiny of regulators, making locating reliable liquidity providers and partners a primary objective. Let’s discuss how crypto liquidity works and how you can find a reliable partner for your business.
Understanding Crypto Liquidity
In general terms, liquidity providers are large financial institutions, such as banks and top-tier corporations, that actively engage in trading and economic activity. These entities provide the financial, technological, and legal means for brokerages to provide trading services to investors and traders.
Liquidity patterns change depending on the market in which the broker and the LP engage. For example, liquidity in the crypto world is more sensitive due to market forces, such as volatility and speculations, that drive the demand for virtual currencies, coins and tokens.
Crypto liquidity pools are becoming increasingly available. However, with the recent scandals and turmoil of exchange platforms and websites, brokerage companies are becoming more selective.
Functions of Crypto Liquidity Providers
Providing liquidity to brokerage companies entails connecting to trading markets and liquidity pools, offering legal backing, acquiring vast market knowledge and maintaining steady supplies.
- Crypto LPs provide brokers with access to trading markets, where cryptocurrencies, blockchain tokens and DeFi project assets are tradable.
- Liquidity providers connect crypto exchanges to a network of pools where staking activities, liquidity farming and other money-generating activities take place.
- Financial institutions may provide legal consultancy, given the knowledge of legal repercussions associated with crypto trading.
- Crypto liquidity companies harness their experience, predicting potential market shifts and speculating on upcoming events.
- Liquidity providers are tasked with sustaining liquidity streams, giving an uninterrupted flow of financial instruments.
Qualities of a Reliable Liquidity Partner
Before connecting your crypto exchange or brokerage service to a liquidity source, there are several considerations you need to take into account. Finding a reliable partner is a make-or-break deal. Therefore, ensure your financial partner demonstrates the following qualities.
Legality
Your crypto liquidity provider must fully comply with relevant laws. Moreover, ensure they continuously observe the changing legal environment regarding crypto trading and custodial services across different jurisdictions.
This characteristic is crucial because relying on an unregulated source will bring troubles to your exchange. For example, if the provider ceases to operate, your trading activities and userbase will be paralysed.
Financial Expertise
Asset mismanagement is one of the common reasons why many financial institutions and banks fail. We have the case of The Silicon Valley Bank, First Republic Bank and Signature Bank, who triggered a banking crisis in the US in 2023 due to money mismanagement and association with cryptocurrency.
Therefore, only choose a partner with vast experience in managing multi-account assets, significant trading accounts and large investors’ capital.
Service Fees
Liquidity providers impose different charges in exchange for their services, which can vary widely depending on the functions they provide, their expertise, and the type of financial instruments they offer.
Therefore, determine your budget during the business planning stage and ensure the provider’s fees are aligned with your expectations. Additionally, you can check if the LP offers customised pricing plans that vary according to the service you opt for.
Technical Reliability
Today’s liquidity streams, pools and networks are connected over the Internet and between cross-border servers and consoles. Therefore, technical stability is prime when it comes to offering crypto trading and exchanging services, where coin prices and volatility shift every few seconds.
Additionally, blockchain congestion is a common issue facing established cryptocurrencies, such as Bitcoin and Ethereum. Therefore, check out the used chains by the provider. Layer-2 networks offer faster transaction processing capabilities.
Conclusion
Liquidity provision is a sensitive issue, especially in highly speculative and competitive markets, such as the crypto market. Providing crypto liquidity is a key aspect of the success of many exchange platforms and crypto trading firms.
Before connecting your crypto brokerage firm to a liquidity source, ensure they meet your requirements and legal specifications for operating in the world of crypto trading.