One of the biggest mistakes made by newly established Forex Brokers is not maintaining a line of good communications with their liquidity providers. Many Forex Brokers look at the LPs as some sort of anonymous exchange that they can pass their trading flow to. What they fail to realize is that they must be completely transparent with the LP about the type of flow they are sending.
With funds and systems traders becoming more sophisticated they are always searching for Forex Brokers they are willing to accept their trading. The Forex Brokers are usually enticed because of the high volumes these types of clients bring in but forget about how this may impact their Liquidity Providers. If the LP is not informed about the type of trader or is taken by surprise this will usually come back to the Forex Broker and in the end, might even jeopardize the relationship.
The purpose of the LP is to provide a market for Forex Brokers and their clients. This does not mean that trades need to be accepted under any conditions and the LPs have the right to have terms for trading and transacting with them. The job of the Forex Broker is to profile their clients and to inform the LP of the type of trading they can anticipate from the client. If the client is unwilling to provide information or allow themselves to be profiled it is highly likely they have made the rounds from many different Forex Brokers and have been asked to leave. It is really important to remember that if these clients were trading in the futures markets or equities markets many of their trades would not be executed at all. ECNs and trade management systems ensure that orders are routed to the exchange in a fair manner. This is also the case with Forex but since no centralized exchange exists the LP manages order routing and makes sure the only tradeable prices are transacted.
Constant communication between Forex brokers and their LPs is essential to maintaining a long term relationship and to protect each other’s common interest.
Trading Forex and Derivatives carries a high level of risk, including the risk of losing substantially more than your initial investment. Also, you do not own or have any rights to the underlying assets. The effect of leverage is that both gains and losses are magnified. You should only trade if you can afford to carry these risks. Trading Derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved, and seek independent advice if necessary.