Can non-bank liquidity providers support fast markets?

eFX study highlights lack of consensus view; Non-traditional liquidity makers including CMC Markets played a key role in maintaining an orderly market during COVID-driven volatility in March 2020

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A white paper commissioned by CMC Markets Institutional, in conjunction with Worldwide Business Research, has underlined a distinct polarisation of attitudes when it comes to the role which can be played by non-bank liquidity providers.

As a leading provider of liquidity and white label trading solutions, CMC Markets Institutional has been developing its own role as a non-bank liquidity provider (NBLP) in recent years.

By leveraging its ability to internalise a significant amount of flow as well as reaching out to a select group of prime brokers and other pricing sources where necessary, the company can be a true liquidity maker. This white paper presented an opportunity to gain a more granular understanding of buy-side perceptions of this specific genre of liquidity provider.

Key findings included:

  • NBLPs help reduce latency – innovation has had a positive impact across the market
  • Retail flow adds up – these institutions do genuinely act as proxy wholesalers of liquidity
  • Digitization has clouded the picture, but the most efficient NBLPs still add value.

Richard Elston, Group Head of Institutional at CMC Markets, commented:

“Whilst the whitepaper certainly provided support for the role played by non-bank liquidity providers, this view was far from universal. There was a perception from some that they increased costs, whilst self-proclaimed traditionalists also expressed concern that they simply didn’t want a counterparty who is considered part of the retail world. However, given market efficiencies and the scale of internal order books both built from retail and other institutional clients, this arguably shows a rather dated view.”

Non-traditional liquidity makers including CMC Markets played a key role in maintaining an orderly market during COVID-driven volatility in March 2020. This was most notable when gold prices threatened a dislocation as demand for safe haven assets soared whilst precious metal refineries and distribution networks were badly constrained.

Mr Elston added: “The liquidity market remains ripe for further disruption. This research shows that even if there are some traditionalists who are happy with the status quo, many participants are ready to adopt change and others want to see even more innovation. Further evolution in how liquidity is constructed seems inevitable.”

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