The Importance of Understanding Your LP – API Liquidity and Market Depth

The aftermath of the financial crisis has been punctuated by calls for financial reform to ensure that it will never happen again.

Basel III, which was developed in response to the deficiencies in financial regulation, increased capital requirements, high-quality liquid assets, and a decreased bank leverage.

Its implementation has been extended repeatedly and is now scheduled to be in full force until 1 January 2022. Yet, while we see a reduction in banks willing to make markets, turnover in capital markets is at an all-time high.

The reason behind what could be seen as a paradox is credit. Liquidity Providers are increasingly feeding off the liquidity of others in a recycling process that goes unnoticed to most market participants.

The rise in prime brokerage trading in recent years is evidence of the increased reliance on credit, which is unsurprisingly driving the widening of spreads.

So, when a broker offers liquidity via direct API connections, what does this actually tell you about the product on the other side? Arguably not very much – the standardized technology is easy enough to integrate.

What’s more important is what you’re getting access to from the counterparty. In a world that’s increasingly influenced by liquidity recyclers, you need to have a solid understanding of what’s actually on offer here.

Those who are merely reposting the liquidity of others will leave you exposed to the risk of seeing orders unfilled or being requoted – especially in fast moving markets – whilst they will be adding margin in, too.

Those who can generate their own liquidity, as well as source from elsewhere, are likely to have a richer pricing ladder with more depth at each level, in turn offering fewer rejected orders and better overall transaction costs.

This is where serious API offerings – such as API Direct by CMC Markets Connect – enter the stage. The product provides stable liquidity and market depth across all asset classes, augmented by its own internal flow.

The CMC Markets Connect API features more than 85 global indices, 113 commodities, and 50 treasury CFDs, as well as over 8,000 stocks and 330 FX pairs (including 63 Spot FX pairs).

The LSE-listed trading technology firm is thus in a clear position to meet the shortage of mid-market liquidity in the institutional market. The liquidity crisis is a risk to market efficiency, not to mention the poor client experience and lower profitability for counterparties. ‘Flash crashes’ are only likely to increase in number.

A quality API offering is the only way for institutional clients to trade with a reliable source of liquidity and not be betrayed by trading technology.

If you are interested in accessing multi-asset class liquidity provision through a single source, please contact Andrew Wood at [email protected]