The European Securities and Markets Authority (ESMA) introduced the Markets in Financial Instruments Directive (MiFID) in 2007, providing direct regulation over liquidity providers and harmonized services that retail clients can expect across the board.

Although the original MiFID outlines the regulatory reporting requirements of liquidity providers and the required conduct of investment service providers, MiFID II and MiFIR went further still in 2018 to facilitate even further transparency for retail traders. These new measures were designed to protect those using leveraged products, including contracts for difference (CFDs) – a product that is most used by retail traders.

Why do retail clients need liquidity providers?

Liquidity providers are also referred to as market makers.  The primary role of liquidity providers is to deliver consistent two-way pricing across assets throughout the training week.  They make their money via the Bid/Ask spread and as such, are incentivized to win your order flow by offering tight spreads in a healthy size. Liquidity providers create the market for buyers and sellers to execute their orders.

Retail clients execute orders via Brokers and often look for who is providing the most attractive terms by way of spreads and top of book depth.  Clients thrive on consistent pricing, which means reduced slippage and high fill rates.

What safeguards should you expect?

The impact of MiFID II has forced the financial service sector to revisit the storage and usage of client assets. The new regulation helps to safeguard retail clients’ liquidity by enforcing investment firms and brokerages to implement proper controls that segment your funds from their own operating funds. MiFID II also encourages brokers to implement negative balance protection on a “per account” basis.

These measures, along with the most reputable regulators, such as the UK’s Financial Conduct Authority (FCA), are helping to protect the best interests of retail traders.


To promote stable, orderly financial markets and a secure trading environment for retail clients, brokers, exchanges and liquidity providers should be well-regulated. The gold standard for UK-based retail traders remains the FCA, while the Securities Commission of The Bahamas (SCB) is another regulator that licenses many of the leading brokerages and exchanges throughout Europe.

Negative balance protection

The FCA implemented new permanent restrictions on CFD trading for retail clients as of July 2019, ensuring that clients cannot lose more than the total funds deposited within their CFD brokerage account. This restriction is known as negative balance protection.

Segregated accounts and tier one banks

Brokers and trading exchanges licensed by the likes of FCA must ensure adequate segregation of client money accounts. Client funds should always be kept separate from the operator’s own funds. This ring-fences the funds of retail clients, ensuring their money is protected should the operator cease its operations.

Safe-deposit methods

The safety of retail client funds is paramount to the reputation and business activity of the leading brokerages and trading exchanges. Retail traders should look for brokers and exchanges that encrypt user connections using Secure Socket Layer (SSL) technology. This ensures all sensitive financial data is transferred in a secure, cryptographically protected environment, away from the prying eyes of potential cyber-criminals.

The importance of negative balance protection for retail clients

Negative balance protection is a feature offered by brokerages and exchanges to retail clients to ensure losses don’t exceed deposits. As the guiding regulator, the FCA is the party that describes what is a retail client exactly. To be precise, retail clients are individuals that are “not a professional-client”, such as those who trade as a hobby or in search of a second income.

Under MiFID II, retail investors have more protection and compensation rights than professional clients. Negative balance protection is a major commitment from brokers and exchanges, who are typically qualified as “professional clients” in the eyes of their liquidity providers. This means they are often forced to take the risk of their retail clients on the chin, reinforcing the need for brokers to carefully select the right liquidity providers that abide by the ESMA’s ‘best execution policy’, enabling brokers to close negative positions fast and minimize losses incurred.

There are state-of-the-art trading platforms that give retail clients total oversight of their market exposure for sharper, more engaging risk management. UK-based INFINOX’s IX Prime platform provides a tool called ‘Position Keeper’ that allows institutional entities to get a transparent overview of their exposure per asset class, with risk metrics putting clients firmly in the picture as to how their books are positioned.

Having the framework in place is vital for compliance and growth

The concept of MiFID II has long been to improve the openness and competitiveness of the financial markets for retail traders. For global financial trading brokerages to continue to compete and grow, having the technological foundations in place is equally as important as securing multiple licenses to provide regulated retail trading in all four corners of the globe. This includes building a digital network of liquidity sources that can provide lightning-fast execution and accurate market prices.

IX Prime simplifies how trading platforms monitor their exposure with systems like Position Keeper. This is as well as having systems to simulate news releases that may impact your client’s positions, and subsequently, your underlying profit and loss systems.  The IX PRIME platform hosts access to multiple liquidity sources, including Prime of Prime partners, Tier 1 banks, and market makers. IX Prime pairs its clients – which include retail brokers, exchanges, and hedge funds – with liquidity providers through matching order and flow type executions to ensure the tightest prices and most efficient venue.

Liquidity providers like IX PRIME that can provide institutional-level liquidity and compatibility with state-of-the-art trading platforms like MetaTrader 4 and 5 are best-placed for long-term growth. It’s incumbent upon brokers and exchanges to use liquidity providers in accordance with ESMA guidelines. These guidelines insist that brokers and exchanges should never be “over-reliant” on a single liquidity provider or venue, which is why multi-source providers like IX PRIME are well-positioned to meet the volume requirements of partners and their retail clients in the years ahead.

MiFID II also insists that brokers and exchanges consider the “expertise and market reputation” of third-party liquidity providers and ensure they do everything in their power to use market makers that deliver “the best possible result” to retail clients. MiFID II now considers a key driver of a market maker’s reputation as being their ability to excel in the “execution of client orders” too. Brokers can safeguard retail clients’ liquidity by working with reputable and compliant LP partners that can cover MiFID II requirements and deliver fair, transparent execution for retail traders.