Liquidity aggregation — What is it? Why it’s so important?
Cryptocurrency trading platforms are used by many traders, in order to obtain additional profits in the crypto market. But how do those platforms really work?
How cryptocurrency exchanges work
Cryptocurrencies are traded through either centralized or decentralized exchanges. Those exchanges operate with a certain amount of buyers and sellers. The market participants create the buying and selling price through their bids.
The connections between these different exchanges are limited, as users tend to cluster around what they consider to be the ‘best’ exchange. The exchanges are also not trading at the same prices, but the price differences usually even out through simple market supply and demand. Exchanges offering certain options, such as leverage, the option to short or fiat trading pairs are in a great advantage. Additional drivers can include support for specific cryptocurrencies, where some exchanges specialize in supporting as many different cryptocurrencies as possible, while others support only a limited amount.
The discrepancy in price often occurs between exchanges due to users being clustered on certain exchanges which are more popular. This creates a form of isolation of every exchange. However, some traders will use arbitrage, which will take advantage of the price differences and help even out the price. Even with this taken into consideration, the price differences and volatility are sometimes too much to handle, and the price does not equalize across the exchanges.
What is Liquidity Aggregation?
The demand for a service where users can buy or sell cryptocurrency from any trading exchange without having an account is extremely high.
This is exactly what a Liquidity Aggregator is; the platform users will have access to pricing at any major exchange by only having a single account, and will be trading through a single API.
Liquidity Aggregation is also critical for large institutions investors. The reason for that is simple; the order size is much higher and might affect the price on one exchange. That’s why Liquidity Aggregators can help spread out the orders to not affect the price by utilizing many exchanges.
Liquidity Aggregation allows institutional, as well as retail traders to deal with only one company, and have their order automatically spread over multiple exchanges without having to deal with the exchanges directly, therefore getting the best price possible while keeping the prices stable at all of the exchanges used.
Conclusion
Liquidity Aggregation is an amazing concept, which can be utilized to the benefit of both the trading platform and the traders themselves. However, no exchange offers a stable and working Liquidity Aggregation at the moment. PrimeXBT is developing a system which will use Liquidity Aggregation system connected to 12 top exchanges, and with it becoming a leading trading platform in terms of options and features offered (along with many other features such as high leverage, the option to short sell).
