A liquidity provider by definition is a market broker or institution which behaves as a market maker in a chosen asset class.
What does it mean? The liquidity provider acts at both ends of currency transactions. He sells and buys a particular asset at certain prices. It means that he is making the market. Nowadays stockbrokers have liquidity providers who make the commitment to provide liquidity in given equity.
Why Should You Care About Liquidity?
Liquidity on forex market can be understood as the ability of a valued item to be transferred into currency in a certain period of time. During trading on currencies, you’re trading on the market that is by itself, liquid. However, you are trading based on the available liquidity of financial institutions that allow you to get in or out of the trade of your choice. Higher liquidity is desirable for everyone on the market. It drives down the spreads and the cost of trading.
Greater price stability
As a liquidity provider, we can influence greater price stability and also improve liquidity by making it safer. Thanks to this function liquidity providers become important services. They usually take a significant amount of risk but are still able to profit from the spread or by positioning themselves thanks to conclusions based on valuable information available to them.
What are the Signs of Liquidity & Illiquidity?
The illiquid market has chaotic moves or gaps in prices. The level of buying or selling volume at one moment can suddenly change.
A highly liquid market is also called a smooth market or a deep market.
Most traders need and should care about the liquid market because it is very hard to manage risk if you’re on the wrong side of a big move in an illiquid market.
Selecting a Liquidity Provider
The liquidity provider should meet high standards. It must be stable, trusted, and must have depth across multi-asset instruments. The crucial feature is also fast and reliable trade execution.