Who are Liquidity Providers?

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You might have been wondering why spread of currency pairs varies from one broker to another. Why some brokers have huge or small gaps, better price fills and trading restrictions or not than the others during normal market conditions or economic news announcements? It all balls down to Liquidity providers. So many traders don’t have an idea about the importance of liquidity providers in the Forex markets and how it can affect the performance of their broker services to them. You see liquidity providers makes it possible for brokers and traders to transact business in respect to any financial markets and we have several one of them.


A liquidity provider connects many brokers and traders together, increasing the liquidity of the joint market. A higher liquidity is desirable for everyone, as it drives down the spread and thus the cost of trading. This is a reason you will find spreads varying from one point to another in different Forex brokers. A particular broker may offer 0.2 spread for USD/JPY currency pair while another broker will offer 1.4 spread for the same currency pair. The more the liquidity provider a broker has, the lesser the spread the broker will offer for traders to transact in the market.



Straight-through processing commonly known as STP will often try to connect themselves to many large liquidity providers to improve their own offered liquidity and prices. Liquidity providers are often large banks and other financial institutions. In the world of Forex the majority of global liquidity is provided by a number big name investment banks (referred to as Tier 1 liquidity providers) that make markets in all the available in currency pairings.



These investment banks all have currency trading desks where traders quote both Buy and Sell prices in the currency pairings they offer. It is thought that these major liquidity providers in fact lose money on the majority of the trades placed with them, due to the very tight spreads on offer. However Tier 1 liquidity providers are then able to use this order book info to their own advantage ultimately allowing them to turn significant profits. Personally i kind of have a biased mind regarding liquidity providers because i think they use these order book info by knowing the number of available buyers and sellers in a particular market.



Each time you place an order with a stop loss and take profit, it is being sent to your broker and then your brokers sends the info to the liquidity providers which why sometimes it might seem like the market is a little bit manipulated. They often engage in a daily practice called “Stop Loss” hunting due to the available information they have at hand since they are aware of the total number of buyers and sellers in the market. However, we do not want to focus on that, as traders our major goal is to find a means of making consistent profits from the market. You just have to figure out how to flow with these banks to be a successful trader.



Except you are a massive shark, as a retail trader you will never directly deal with a Tier 1 liquidity provider but will instead deal with a brokerage or prime brokerage that has an established relationship with one or more Tier 1 liquidity providers. Tier 1 Liquidity providers will only enter to relationships with financial institutions and individuals they know to be financially sound, in order to reduce their counter-party risk. This means some STP retail brokerages have an even looser connection with Tier 1 liquidity providers passing their trades through a company which has established relationships with various prime brokerages and tier 1 liquidity providers. This is partly why the spreads on offer for retail traders tend to be significantly wider than those available to institutional traders and generally why institutional traders will get a preferential treatment in whole than retail traders.



However Brokerages operating a Dealing Desk are taking on the role of a liquidity provider themselves by allowing clients to both Buy and Sell currency. These Dealing Desks make money through the Bid-Ask spread, as well as hedging client’s positions internally or in the underlying market. Often these smaller Dealing Desks often rely on the fact the majority of retail traders lose money in order to turn a profit. This is why most brokerage operating through Dealing Desks are also called Market Makers. This is why many retail traders prefer to trade with a STP/ECN brokerage as this model doesn’t involve any possible conflicts of interest.




There are several liquidity providers in the Forex market, however the world’s largest liquidity provider is the Deutsche Bank, also known as a leading retail and investment bank. Other major liquidity providers include Bank of America, Morgan Stanley, Citi bank, Commerzbank, Goldman Sachs, HSBC, Credit Sussie, JPMorganChase, Bank of Tokyo, Barclay’s Bank, Liquid Markets etc. Their function is to facilitate trading in currency markets and other financial instruments by providing a pool of price, (which they own), so that buyers and sellers can trade easily without having to locate and deal with other individual traders. In other words, they make the currency market “liquid” or easily converted to cash.



In conclusion, liquidity providers play a vital role in the Forex markets and i think as retail traders we should not overrule their importance.





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