Types of liquidity providersJanuary 2, 2018
The provision of liquidity to the market is of crucial importance, since it protects the market against
high volatility, and results in more competitive prices for traders. The fact that the market is liquid
ensures its stability, makes the flow of transactions easier and quicker and facilitates trading.
Therefore, all markets, including the forex market, needs liquidity providers, who can guarantee that
the trading will run smoothly. LPs are market makers, who make the purchase and sale of assets
possible since they prepare exchange rate quotations for traders.
There are certain types of liquidity providers. Top quality, large investment banks, and companies are
called Tier-1 liquidity provider since they offer a big volume of currency pairs to trade with. These
LPs do not count on only bid/offer spreads to gain profit, but they also offer tight spreads for
currencies and trade positions. Other liquidity providers include hedge funds, smaller banks, high net
value individuals, brokers and even market participants, who increase the trading volume by
effecting transactions at the market. Some market makers conclude transactions on behalf of their
The factors, which contribute to the liquidity on the FX market include the presence of many large
companies, governments, individuals, and organizations in the international marketplace and the
hours of operation of the OTC currency market, since now it is open 24 hours seven days a week.
the main factor that favors the liquidity is a large number of active market participants, who effect trades
from various countries all over the world. Fortunately today almost anyone with even a small amount
of investment capital and the connection to the Internet can start trading on the retail forex market,
and the number of newbie traders is constantly growing.
A dozen or so years ago it was not so easy for individuals to trade, and only large companies and banks could provide liquidity to the FX market.
Currently, the most liquid currency pairs are Euro against US dollar and US dollar against the Japanese
yen. Pounds and francs are also high in this ranking, as well as Australian dollars. When investors
trade in these currency pairs, they can achieve higher profits and contribute to FX market liquidity.
We should remember how important are liquidity providers on the market and how much we can
attain owing to them.