Tight Spreads Are No Longer Enough

Tight Spreads Are No Longer Enough

Institutional liquidity has spent years being sold on the same promises: tighter spreads, deeper pools, faster execution, and broader market access.  

According to Liam Smith, UK Chief Operating Officer at 26 Degrees Global Markets, those differentiators are no longer enough on their own. As access to liquidity has become increasingly commoditized, the real competitive advantage has shifted elsewhere, toward execution intelligence, operational resilience, and a deeper understanding of how order flow behaves in increasingly volatile markets. 

Speaking with FinanceFeeds Editor-in-Chief Nikolai Isayev on the latest FinanceFeeds Podcast, Smith argued that brokers have reached a point where simply comparing spreads is no longer enough to evaluate a liquidity provider. Instead, firms are placing greater emphasis on execution quality, quote stability, routing intelligence, credit facilities, and the ability of a provider to remain dependable when markets become stressed. The discussion explored how January’s market turmoil exposed weaknesses in parts of the Prime of Prime market, why retail broker dealing desks are becoming significantly more sophisticated, and why liquidity providers competing purely on price risk becoming irrelevant.

Liquidity Has Become A Commodity 

Liam Smith believes one of the biggest structural shifts in recent years is that access to institutional liquidity is no longer difficult to obtain. APIs, bridge technology, and pricing infrastructure have become widely available, making competitive spreads far easier to deliver than they were five years ago. 

“It’s no longer just about access to markets,” Smith said. “Anyone, even retail traders, can go and get a price feed via API, have updates, see really tight prices, but that’s not what liquidity management is about anymore.” 

Easier access has made liquidity management more difficult. Brokers now face a crowded field of providers offering similar feeds and headline pricing, making it harder to distinguish between firms redistributing prices and those capable of delivering a durable institutional liquidity service. Sustainability has therefore become as important as the initial quote, particularly for dealing desks that do not want to reroute flow repeatedly because pricing, execution or risk conditions deteriorate. 

Part of that growth in provider numbers has come from retail brokers expanding into institutional and wholesale liquidity. As the cost of acquiring retail clients has risen, B2B services can appear to offer an attractive additional revenue stream without the same consumer marketing expenditure. Smith argued that some firms enter the market without fully appreciating the operational, execution and risk-management demands involved. 

“Many underestimate heavily what’s actually required to deliver an institutional-grade feed, and it’s not just the pricing,” he said. “Flow profiles change so much. Brokers will send a whole array of flow profiles down a single feed, so you need to have the intelligence to route that flow, segment it, and do so on a sustainable feed that will survive with your business.” 

The challenge is handling increasingly varied and sophisticated end-client flow. As expert advisers, algorithmic tools and AI-assisted coding make advanced strategies more accessible, liquidity intelligence has never been more important. The differentiator is no longer who can distribute the tightest price, but who can understand the flow, route it appropriately and sustain execution over time. 

January Became A Stress Test For Liquidity Providers 

The strongest part of the conversation centred on January’s sustained one-directional rally in gold, which Smith described as a defining moment for many brokers. While market volatility itself was not unusual, its persistence exposed operational weaknesses that had remained hidden during calmer conditions. 

Many firms initially chose to internalize risk, expecting markets to reverse. When the rally continued, they rushed to hedge, only to discover that some of the credit lines and risk facilities they believed were available had effectively disappeared. 

“Many started to want to hedge, and by that point we found that a lot of them were going to their liquidity providers, and the facilities they thought were there, in terms of NOP limits and conditions, were not actually.” 

According to Smith, aggressive competition among newer Prime of Prime providers contributed to the problem. In an effort to win business, some firms extended risk limits that ultimately proved unsustainable once market volatility intensified. 

The result was that brokers who needed support most urgently found counterparties withdrawing capacity rather than expanding it. For Smith, this demonstrated why operational resilience matters as much as headline commercials. 

Against that backdrop, Smith said 26 Degrees did not need to scramble for additional capacity or change conditions during January, because its risk and credit models were already positioned for stress. Much of the focus instead was on helping brokers that thought they had facilities in place, but were forced to re-engage existing relationships or quickly find new ones when they needed to hedge.  

The experience also reinforced another lesson: volatility is not simply a dealing desk issue. Successful brokers increasingly require coordinated responses from management, finance, treasury, and risk teams, allowing funding and hedging decisions to be executed within hours rather than days. 

“It’s not just the dealing desk,” Smith said. “It’s the management team making the decisions, the risk teams, of course, the finance teams, making sure that everyone is aligned, so that you can act very quickly.” 

Execution Quality Often Matters More Than The Spread 

Although spreads remain one of the industry’s favourite marketing metrics, Smith argued they reveal surprisingly little about the true quality of a liquidity relationship. Modern dealing desks increasingly monitor execution statistics that were rarely discussed a decade ago, including midpoint accuracy, quote stability, rejection rates, and fill quality. 

One unstable quote during a volatile session can trigger stop-loss orders, create customer disputes, and damage a broker’s reputation long after markets have settled. Those costs rarely appear when comparing providers based solely on headline spreads. 

“One bad tick can really disrupt a business,” Smith said. “A single quote can cause severe damage to their reputation.” 

He also highlighted rejection rates as one of the industry’s most overlooked execution metrics. Even when rejected orders are filled milliseconds later, those delays may consistently move execution against the broker over thousands of transactions. 

Likewise, midpoint analysis can reveal hidden costs that tighter spreads fail to capture. A provider may appear competitive while its midpoint sits away from broader market levels, quietly increasing execution costs despite attractive quoted spreads. 

For Smith, execution quality should therefore be evaluated over weeks rather than individual trades, with brokers paying closer attention to consistency. 

Retail Brokers Are Becoming More Sophisticated 

Smith believes today’s leading retail brokers increasingly resemble institutional trading firms. Concepts such as markouts, yield curves, and flow segmentation, once largely confined to bank dealing desks, are becoming standard tools for larger retail brokers thanks to significant improvements in bridge technology and execution analytics. 

That increased sophistication has also changed how firms view so-called toxic flow. Smith prefers distinguishing between abusive trading and what he calls “sharp flow,” arguing that informed trading is not necessarily undesirable if priced appropriately. 

“We are very happy to support sharp flow,” he said. “It’s just going to get a price that is justified and sustainable for it.” 

Communication between liquidity providers and broker dealing desks has therefore become increasingly collaborative, with firms exchanging information about execution, routing and flow characteristics instead of treating liquidity as a simple black-box service. 

Smith also cautioned against making broad assumptions about client behaviour. Brokers that rely on blunt regional or cohort-level assumptions may end up rejecting significant volumes that could otherwise be priced, managed and supported appropriately. 

The Next Competitive Edge 

Looking ahead, Smith expects the industry to continue moving away from competing solely on pricing and market access. The firms that emerge strongest, he argues, will combine intelligent execution management with resilient infrastructure, transparent communication, and dependable credit relationships capable of surviving future volatility events. 

“If you’re just offering a price feed,” he concluded, “your business is going to dry out pretty quickly.” 

It is a simple prediction, but one that captures the central message of the discussion. Institutional liquidity is no longer defined by who can advertise the narrowest spread. As brokers become more sophisticated and market conditions become less predictable, execution intelligence is increasingly replacing liquidity access as the industry’s most valuable differentiator.