What Does a Liquidity Provider Do?

Author: Rosemary Barnes
30.06.2021

The Forex market is among the most progressive instruments that attract new players worldwide, and the number of brokerage companies is on the rise. A newcomer broker faces a string of challenges, including the high level of competition, as the overall number of such companies has surpassed the mark of 3000. Liquidity providers (LPs) are among the most important criteria for a beginner brokerage company.

What is liquidity provider in Forex?

The vast majority of beginner players have a wrong understanding of the Forex market. While talking about the broad sense, Forex (FX) is a marketplace for buying and selling currencies no matter what the volumes are. For instance, when a government purchases US Dollars for its reserve funds, it becomes a player in the FX market as well.

What are the players who maintain the market active, stimulating deals be executed instantly? World's largest banks, hedge funds, and other giant institutions manage billions of dollars and other currencies, making it possible for other players to exchange currencies in seconds.

Meanwhile, a broker cannot deal with those institutions directly. Mediators are highly required to provide traders with access to the market, and such mediators are called LPs.

Liquidity providers ≠ market makers

What is liquidity provider? The herein mentioned explanation gives an image of how such companies work; meanwhile, beginner players frequently confuse LPs with market makers.

Market makers are institutions that guarantee the execution of orders - i.e. banks, funds, etc. In other words, they make the market active. On the other hand, some brokers don't apply to liquidity providers, acting as market makers themselves but their order books are rather limited.

When a broker understands how liquidity provider works, it's high time to apply to reliable companies, getting a jumpstart on the market. Note that providers are of two types.

Types of liquidity providers

The two possible types of liquidity providers are Tier 1 and Tier 2. The Tier 1 providers head the ranking, as they deal with the largest world's banks and funds, including Barclays, Morgan Stanley, BNP Paribas, UBS, and other major players. This said such providers guarantee the highest liquidity and zero spread.

As for Tier 2 providers, they act as market makers, setting prices for retail clients. These companies are interbank mediators, offering less beneficial conditions for brokers and their clients.

In search of the best liquidity provider

What does liquidity provider do for a broker? This question sounds somehow wrong, as liquidity providers bring benefits for a broker's clients, making their deals executed immediately and protecting them from losses. This said a reliable and trustworthy company is among the necessary links of the overall success chain.

B2Broker is at the apex of the Forex liquidity providers chain, as the company is always moving forwards, pushing clients to new peaks. Get the deepest liquidity pool with 80 trading pairs. If you deal with B2Broker, traders get their orders executed from 12 milliseconds. Furthermore, the company offers liquidity for other assets and a set of effective turnkey solutions.

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