Composite Liquidity vs Direct LP
This comparison examines two approaches to sourcing liquidity: aggregating from multiple providers (composite) versus routing to a single provider (direct). The choice significantly impacts pricing, resilience, and execution quality.
| Dimension | Composite Liquidity | Direct LP |
|---|---|---|
| Price source | Best bid/ask aggregated from multiple LPs | Single LP's bid and ask |
| Spread competitiveness | Tighter — LPs compete against each other | Wider — no competition, single provider pricing |
| Depth | Deeper — combined depth from all LPs | Limited to one LP's depth |
| Resilience | High — if one LP fails, others continue | Low — single point of failure |
| Latency | Slightly higher — aggregation engine adds processing time | Lower — direct connection to one venue |
| Complexity | High — requires aggregation technology and LP management | Low — simple point-to-point connection |
| Cost to operate | Higher — multiple LP relationships, technology costs | Lower — single relationship |
| Best for | Most retail and institutional clients seeking best pricing | Latency-sensitive strategies or specific venue requirements |
Price source
Composite Liquidity
Best bid/ask aggregated from multiple LPs
Direct LP
Single LP's bid and ask
Spread competitiveness
Composite Liquidity
Tighter — LPs compete against each other
Direct LP
Wider — no competition, single provider pricing
Depth
Composite Liquidity
Deeper — combined depth from all LPs
Direct LP
Limited to one LP's depth
Resilience
Composite Liquidity
High — if one LP fails, others continue
Direct LP
Low — single point of failure
Latency
Composite Liquidity
Slightly higher — aggregation engine adds processing time
Direct LP
Lower — direct connection to one venue
Complexity
Composite Liquidity
High — requires aggregation technology and LP management
Direct LP
Low — simple point-to-point connection
Cost to operate
Composite Liquidity
Higher — multiple LP relationships, technology costs
Direct LP
Lower — single relationship
Best for
Composite Liquidity
Most retail and institutional clients seeking best pricing
Direct LP
Latency-sensitive strategies or specific venue requirements
How Composite Liquidity Works
A composite liquidity engine connects to multiple LPs via FIX protocol, collects streaming quotes, normalizes them, and constructs a unified order book. The best bid across all LPs becomes the composite bid; the best ask becomes the composite ask. This composite is almost always tighter than any individual LP because it represents the point of maximum competition. When a client order arrives, it's matched against the composite book and routed to the LP offering the best terms.
When Direct LP Makes Sense
Direct LP connections have the lowest possible latency — no aggregation processing overhead. For high-frequency or latency-arbitrage strategies where microseconds matter, the simplicity of a direct connection may be preferred. Direct LP also makes sense when a specific venue has unique liquidity (e.g., a regional bank with strong pricing in a specific currency pair). However, for the vast majority of trading use cases, the benefits of composite aggregation far outweigh the marginal latency saving.
Quality Considerations
Composite liquidity quality depends on the LP pool composition: number of providers, diversity of provider types, and the quality of the aggregation engine. Simply connecting to more LPs doesn't guarantee better pricing — poor-quality LPs with stale quotes or high rejection rates can actually degrade the composite. The aggregation engine must filter, score, and weight LP feeds intelligently. This is where the broker's technology investment makes the biggest difference.
Verdict
Composite liquidity is the superior choice for virtually all traders. The competitive pricing, deeper depth, and resilience it provides outweigh the marginal latency cost of aggregation. Direct LP connections remain relevant only for specialized latency-sensitive strategies or specific venue access requirements.