Richard Elston, head of CMC Markets Connect, spoke with FX Markets Magazine to highlight growing use of the term non-bank liquidity provider (NBLP) and why care needs to be taken to keep this separate from Prime of Prime brokerage.
Foreign exchange markets have a superb ability to innovate and adapt to changing regulatory structures and business needs. However, as was seen less than a decade ago, the powerful Prime of Prime proposition was at times misappropriated by some who were simply recycling the liquidity of other second tier market participants.
Care needs to be taken to ensure that the same doesn’t happen when talking about non-bank liquidity provision. Advances in technology and market structures alike allow a small number of well-connected and well-resourced entities to provide a truly differentiated product that can reduce trading costs and improve market quality for all.
Prime of Prime still has a vital role to play when it comes to connecting smaller market participants with tier one liquidity, but misappropriation of the NBLP term risks detracting from its potential. The new generation of liquidity providers have in recent months already played a key part in ensuring the continuous availability of pricing when markets have risked dislocation. This however is only possible as a result of their ability to independently construct pricing ladders and decide how much liquidity they are willing to offer, rather than simply referring back to the underlying market. The protection and correct usage of NBLP will be crucial in ensuring that market participants can readily identify the nuanced services on offer.