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A direct price stream refers to when a liquidity provider streams prices at which trades can be executed directly with another party.

Trading not intermediated via a third party.

Both counterparties to the trade know with whom they are trading.

As a model, direct streaming offers an alternative to trading on a venue.

The advent of direct, continuous bilateral pricing streams is slowly but surely starting to shake up how the market thinks about electronic trading.

Direct streaming allows everyone – dealers, electronic market makers, and the buy-side – to get much (if not all) of what they get from CLOB and RFQ markets in one place.

As an evolution of current execution protocols, direct price streaming is interesting to broker-dealers for several reasons:

  • It allows them to automate trading, helping them to manage costs.
  • It allows them to maintain bilateral relationships with clients, so that liquidity provision can be correlated to their profitability.

What is a direct price stream?

In its simplest form, direct streaming is when a dealer or electronic market maker continuously sends prices and sizes at which it is willing to both buy and sell currencies to their customer.

Different pricing is provided for different sizes.

The customer receives both a price and size that is tailored for them, without submitting a request, so information leakage from the buy side’s perspective is eliminated pre-trade.

When liquidity providers are willing to stream firm prices, the risk that clients might telegraph their trading intentions at-trade is also removed.

Things get more interesting, and useful when a customer aggregates streams from all of their liquidity providers.

The result is effectively a customized central limit order book of immediate, actionable liquidity.

It only includes counterparties that customer knows and has agreed to trade with, and so the prices they see are tailored to the relationships they have with those counterparties.

And to take the idea one step further, clients could also aggregate liquidity from the anonymous CLOB markets with the direct streams they’re receiving from their liquidity providers, creating an even more complete picture of market liquidity.

While some of their direct liquidity providers are likely also trading in those order books, it gives them the ability to act with other market participants (albeit anonymously) with whom they do not have relationships.

Platform Disintermediation?

It has been suggested that if the use of direct price streams continues to grow, it could disintermediate the electronic trading platforms.

History, however, tells us that this is very unlikely.

It didn’t take long for U.S. equity traders in the late 1990s to realize that managing direct connections with every trading counterparty to transmit orders and executions was inefficient, and they quickly looked to aggregators to ease the burden.

Platforms are already stepping in to facilitate the distribution and aggregation of direct streams.

They are particularly suited for the task given they have existing connections to both liquidity takers and makers, saving everyone involved both operational and legal work.

They also can provide some enhancements to the model that would be harder to do if stream aggregation was managed by each end-user.

For platforms that are registered as or have agreements with a broker-dealer, liquidity makers and takers can choose to trade with one another anonymously.

By submitting their preferences to the venue in advance, clients can still feel comfortable that they are only trading with approved counterparties, and that they’re still receiving a “relationship price”.

But by using the platform’s broker-dealer as the intermediary, which allows the execution to be consummated anonymously, they can limit information leakage even further.