Forex  & Crypto Liquidity Providers. Looking for new LP?

The forex market is, simply put, enormous, since it records transaction volumes of over six billion USD on a daily basis! This undeniable fact alone is enough to justify why market liquidity is such a key, critical, integral factor for the market’s existence. Without a liquid market, the forex market would not be able to enable profitable transactions to occur, while greater liquidity is also crucial in ensuring that the flow of transactions is smooth and the pricing offered to traders is more competitive.

Prior to shedding further light on the role of liquidity providers in the forex market and offering advice to independent brokers or to those Starting a White Label brokerage business seeking the best possible partner for the provision of liquidity for their businesses, it is essential to provide certain required definitions that form the overall content and backdrop of the discussion that follows.


What is liquidity in forex?

In the context of finance and investments the term liquidity is used to indicate how fast an investment can be turned into cash. To better illustrate the point, it is useful to compare a market with low liquidity, such as the real estate market, where transactions take several days, weeks, months or even years to be completed, with the much more liquid market of stock selling, where settlement usually takes five business days and ultimately with the highly liquid forex market, where transactions take only two days, with the exception of the Canadian Dollar Vs US Dollar pair, where transactions are settled on the next business day!

The above comparison clearly shows that the forex market is a highly liquid market, in which almost every transaction is completed on time and expediently. This high liquidity present in the market in its turn allows the market to absorb large trading orders without being upset or affected, while also enabling the offer of competitive dealing spreads.

Where does liquidity come from?

The short answer to the question above is that liquidity in the forex market is provided by… liquidity providers. This term however, which usually refers to entities that act as market makers, should not lead one to overlook that there are in fact several participants in the forex market who directly contribute to the provision of liquidity by increasing the recorded transaction volumes. Such participants are central banks, big commercial and investment banks, hedge funds, multi-national corporations, retail forex brokers, high net worth persons, even individual retail traders, without the list being exhaustive.

In a nutshell, the active participation, though at differing degrees, of so many different companies, entities, organizations, governments and individuals in the international forex marketplace is what ensures the high degree of forex trading liquidity available.

Moreover, the notable liquidity of the forex market is also attributed to its extensive hours of operation since the over the counter currency market is open for trading around the clock, across the globe from Australia to the US. What has changed with respect to today’s retail forex market is that it is open to all traders with a sum to invest and internet access. This means in practice that today it is not only large banks that can act as liquidity providers, but also online brokers who act as market makers and serve their retail clients all over the world online.

A closer look at forex liquidity providers

role of liquidity providers

What are liquidity providers

The coined term forex liquidity provider is used to describe any entity or individual acting as a market maker in the forex market, through acting as both a buyer and a seller of an asset, in this case of an exchange rate. Such liquidity providers play an important role since through taking positions on either end of a currency pair they ensure greater price stability in the overall market.

Different Types of Liquidity Providers in Forex

There are two types of liquidity providers in forex: Tier 1 and Tier 2 liquidity providers.

Tier-1 liquidity providers

The image below depicts the world’s largest Tier 1 liquidity providers that currently provide liquidity to the forex market as market makers.

Tier-1 liquidity providers

The forex market’s top liquidity providers are called “Tier 1” liquidity providers and are mostly the world’s largest investment banks that have dedicated foreign exchange departments, allowing them to be able to provide both buy and sell quotes for all currency pairs, thus making the market across the spectrum, while also offering other services to their clients, such as CFD trading.

The “Tier 1” group of liquidity providers is made up of names such as Deutsche Bank, UBS, Barclay’s Capital, Citi, RBS, JP Morgan, HSBC and Credit Suisse, to name but a few. These liquidity providers make markets on all currency pairs and offer the tightest spreads. They are able to make profitable trades since they themselves often trade positions in order to make money, and not just rely on the bid/offer spread.

Tier-2 liquidity providers

As already pointed out however, nowadays it is not only commercial and investment banks that act as market makers in currency pairs, but also many online forex brokers. All of these market makers are both willing and able at any time to either buy forex positions from or sell forex positions to their clients, provided the market is open at that time. The compensation received by market makers is derived from the difference between the bidding rate and the asking rate, also known as the dealing spread. The dealing spread is then the charge imposed for the provision of liquidity as a service.

The existence of an abundance of liquidity providers in the form of market makers in operation in any currency pair, brings about an overall increase in liquidity, which in turn leads to reduced costs for clients making forex trading transactions. This is generally favourable towards trading and facilitates the operation of the market, since it leads to tighter pricing.

Liquidity provision in the retail forex market

In the world of forex trading, one of the most important elements that enable profitable transactions is the existence of a liquid market. Thanks to this function liquidity providers become a very important service.

Role of liquidity providers in forex

Unless they trade very large sums, individual traders in the retail forex market will never get direct access to a “Tier 1” liquidity provider, but will access the market through an online forex broker. This being said, it should be noted that most established, reputable forex brokers typically use at least one or several Tier 1 liquidity providers in order to fill most of the orders they receive. In order to help them reduce their counterparty risk, brokers partner up with financially sound liquidity providers. Usually, online forex brokers choose to connect and team up with more than one liquidity provider, as this gives them access to better dealing rates and spreads. By having more than one liquidity provider, the broker can then offer its own clients the best prices obtainable from several L.Ps.

The typical manner through which online forex brokers execute their trades is through accessing an Electronic Communications Network (ECN), also known as Straight through Processing (STP). Other brokers operate on an NDD or No dealing desk basis, which means that all their transactions are sent directly to a Tier 1 or secondary liquidity provider.

Those brokers operating their own dealing desk effectively take on the role of a liquidity provider, since they allow their clients to buy and sell on their system, while the broker itself takes the other side of the transaction, laying off excessive risk through other professional counterparties if deemed necessary. Such forex brokers acting as market makers, take advantage of the fact that when they trade, the majority of retail traders end up losing money.

Many traders choose to avoid brokers that are market makers since they detect a possible conflict of interest, when the market maker takes the other side of the customer’s trade and thus stands to make money if the client loses money, i.e. profiting at their customer’s detriment and expense. This is one of the primary reasons why many large forex traders tend to use ECN/STP forex brokers instead, because through such a broker the client has the assurance that the trade is being ultimately executed by a Tier 1 liquidity provider, without the executing broker having to take any part or side in the actual transaction.

Regulated liquidity providers are put under the close scrutiny of governmental and other pertinent jurisdictional authorities and this ensures that they offer you complete transparency and compliance to guidelines. Moreover, market reputation is of the utmost importance for liquidity providers, as any stain or shadow would seriously hinder their business.

How Do Regulated Liquidity Providers Make Money?

Liquidity providers make money by taking the counter position in the trade rather than just relying on the spread. Having said that, though some worry that because when you make a profit the liquidity provider will lose money, this would lead them to trade against you, this is mostly an ungrounded fear.

Since their positions are much larger than retail traders, the profit-making mode of LPs, whether that is through commissions per trade or by applying a markup to the price feed or even a combination of both, generates higher income, so they simply don’t need to trade against you to gain.

Who is a liquidity provider and what its role?

The liquidity provider acts as a middleman in the securities markets.

Liquidity provider's role is to act as a professional market marker who makes exchange rate quotations to others ensuring that buyers and sellers have on-demand access to the securities they represent.

To achieve that, the provider may simultaneously buy and sell shares of the security, keeping it "liquid" or available.


Selecting The Right Liquidity Provider

The crucial role of a liquidity provider in the forex market has been adequately analysed above and this is why choosing the right liquidity provider is of great significance for every independent or white label forex broker. Choosing a liquidity provider (LP) is not a decision that should be taken light-heartedly, bur rather requires careful consideration and attention. Prior to choosing your LP as a broker, you will need to perform a detailed analysis of their pricing, economic efficiency, legal aspects, effectiveness of their IT systems as well as their actual trading infrastructure.

When trying to discern which LP is best suited for you, there are some critical factors that you need to bear in mind and pay particular attention to.

  • Trustworthiness: To evaluate this, you will need to check whether the LP is regulated, consider whether it is a public listed company, since this will give you access to all its report and financial and other standing, while if you opt to resort to an LP that is unregulated you need to be sure that it enjoys a good reputation in the market and it is checked, verified and recommended by other vendors as well.
  • The offer: Nowadays a multi-asset liquidity and deep order book is a must. We need to examine is the actual offering of the LP and whether it covers multi-asset liquidity and has a deep order book, that comes with historical data and adequate protocols. Make sure the offering is extensive and covers not only forex, but also commodities, indices, bullions, bonds, equities and other trading instruments that you may require or may need in the future.
  • Execution: The execution offered by an LP should be fast (at least below 100 ms), without rejects or requotes. The quality and speed of execution offered by LP is a crucial factor that merits your consideration. Your chosen Liquidity Provider should be able to ensure the efficient, effective, timely and transparent execution of transactions. Reliability is a must and rejects, requotes and other upsets should not be tolerated.
  • Pricing: Pricing is yet another important aspect you should take into account when choosing your Liquidity Provider. You should only seek to ensure spreads and commissions that are competitive, but also aim to get low overnight fees. Moreover, in the case of commodities and indices trading, make sure that these are not charged with swaps.
  • Feeds: Stability and reliability in the offered feeds should also be a must from your selected LP. Spikes or gaps in charts are to be avoided and feeds should be accurately reflecting prices from multiple sources in a manner that is easily comparable and also allows access to historical market data.

Making the right decision when choosing your L.P. as a forex broker will enable you to benefit further and help stay profitable against volatile market changes and conditions, since you will be better equipped and more responsive to your own clients’ needs.

Make sure you will choose a provider that will offer you highly flexible liquidity solutions, enabling you to gradually build up your transaction volumes and help your business grow.

Liquidity providers for cryptocurrency exchange

When it comes to cryptocurrency trading, liquidity, i.e. the ability to convert a crypto coin into cash or other coins easily and effectively, is also of paramount importance. In fact, the significance of liquidity in the trading of cryptocurrencies is perhaps even more crucial than in the case of forex trading. This is because the liquidity of cryptocurrencies is the make or break factor when it comes to gaining or losing the confidence of the participants in a virtual trading network. This confidence is the cornerstone not only in attracting potential investors but also in retaining the existing ones.

When the cryptocurrency trading takes place under high liquidity conditions, then confidence is high too, investments keep pouring in, technological improvements can be developed and implemented, while both the trading turnover and the exchange rate, flourish.

As one would expect then, prior to investing in a crypto currency, those interested to participate in the crypto network, evaluate the liquidity of each cryptocoin and cryptocurrency pair, and base their decision of whether it is worth their while to proceed with investing on the degree of liquidity they perceive exists.

Cryptocurrencies with low liquidity are exposed to the danger of speculation and often fall victims of bad practices, such as pumping and dumping. This happens because the smaller the turnover of a virtual currency, the easier it is for attackers to influence its exchange rate by either buying or selling large numbers of the specific crypto coin. A large number suddenly being sold for example, would lead to a sharp fall in price. In general, the crypto currency exchange market is very exposed and prone to attacks and high risks and this makes the importance of liquidity and a solid liquidity provider even more profound for brokerages offering trading of cryptocurrencies.

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Posted by
George Milios

George Milios

Lead Generation & Business Growth Specialist

Helping Companies Scale their Organic Traffic & Conversions over the long-term by implementing strategies that work. In addition, George is an avid cryptocurrency researcher, advisor, investor, and trader.

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