Liquidity refers to the availability of an asset in the market and how easy it is to trade with that asset. Thus, high-liquidity digital coins can be bought and sold quickly and with a price near the current market value.
To secure high cryptocurrency liquidity, exchanges look for crypto liquidity aggregators to ensure a coin’s availability and competitive prices. So, if you want to learn about crypto liquidity aggregators and their impact on the market’s dynamic, make sure you read through this guide.
Understanding Crypto Liquidity Aggregators
Liquidity aggregators in the crypto market work with market makers and crypto exchanges to provide brokers and trades with the best prices possible.
They do so by collecting order books’ data from multiple exchanges and then using algorithms to consolidate these books and generate the best rates. Rates generated from multiple exchanges can be better than the price of one exchange by itself.
By doing so, these platforms aggregate crypto liquidity and get access to high liquidity. Additionally, they can provide the best trading conditions, including tight spreads and fast execution time.
The consolidation process of scanning through multiple exchanges’ books happens in real life, and it provides the brokers with updated prices.
Pros Of Crypto Liquidity Aggregation
Many trading platforms prefer using liquidity aggregators in cryptocurrency to get competitive advantages over competitors. These benefits include:
- More liquidity: Consolidating many order books from several crypto exchanges allows these platforms to offer competitive prices with the best trading conditions. Relying on multiple exchanges gives the platform access to a larger liquidity pool, making trade execution easier and faster.
- Offer competitive rates: The access to more liquidity means lots of assets are available and, therefore, reduced prices. The best prices are usually those that are executed first, and with high liquidity, there is a high chance of catching the best price.
- Simple interface: Trading platforms relying on liquidity aggregators usually target newly emerging firms. Thus, they offer a user interface that is easy to use, making it possible for new firms to take serious steps in the crypto market.
- Less risk: Using a crypto liquidity aggregator means relying on more than one crypto exchange. Therefore, if one exchange malfunctions, other exchanges are expected to run seamlessly, minimizing the impact of a single exchange.
Cons of Crypto Liquidity Aggregation
Despite its many benefits, there are several challenges to using a cryptocurrency liquidity aggregator. Let’s take a look at some of these challenges.
- Manipulating the system: The algorithm consolidating the order books can be manipulated using malicious software or bugs. Therefore, it may give inaccurate information, leading to unfavorable outcomes such as losing trading positions and the trader’s money.
- Over-reliance on exchanges: These trading platforms rely on liquidity providers indirectly through crypto exchanges. Therefore, if the exchanges malfunction or face downtime, the trading platforms will face problems generating liquidity.
- High service fees: Some trading platforms relying on aggregators may impose relatively high prices on using their advanced algorithms and, therefore, higher trading fees. If these fees are high enough, they can take away the profit you made from trading.
How Do Crypto Liquidity Aggregators Benefit The Market?
Liquidity aggregators in the crypto market offer great opportunities for brokers and traders. However, they also benefit the market as they provide the following advantages.
Access To High Liquidity
These trading platforms offer access to high-liquid assets and markets, offering trading instruments at attractive prices with the tightest spreads. Thus, they enable traders to execute trades at prices close to the asset’s real value.
Reducing The Risk Of Slippage
Getting access to high liquidity means the availability of assets and market participants who are willing to trade. Therefore, trade execution tends to be faster. Eventually, you may expect minimum slippage time, which occurs when there’s low liquidity and a difference between order placement time and actual execution time.
Reducing The Impact Of Market Whales
Trading platforms with high liquidity access allow every market participant to benefit from the best trading conditions. These include low spread, good trading prices, and low commission fees.
Therefore, newly emerging brokerage firms can compete with key players in the market and lower their influence.
Minimising The Impact Of Fraudulent Schemes
These trading software rely on many exchanges rather than only one. Thus, any hacks or frauds that might occur will affect a single exchange and not multiple exchanges.
It means that these activities’ impact is minimised and less likely to affect the trading platform simply because the platform will consolidate the order books of all other exchanges.
Lowering The Impact Of Market Speculations
News and events usually affect the financial markets. However, a trading platform using a crypto liquidity aggregator is less likely to be impacted by market speculations.
These trading platforms will continue consolidating the books to get the best trading prices and overcome the impact of market speculations.
Conclusion
Overall, crypto market liquidity aggregators offer excellent opportunities for trades and brokers alike. They use order books of multiple exchanges to derive the best trading conditions.
Consolidating multiple exchanges’ books help overcome the impact of a single factor, like downtime at one exchange or fraud activity at one exchange. Therefore, traders can access high-liquid assets with tight spreads and minimum slippage.
Eventually, they provide easy-to-use platforms for newly entering companies to compete against the best in the industry, minimise the impact of whales, and improve the market’s overall performance.
