The liquidity is an ability to turn an asset into cash fast. Without liquidity, it would be impossible to
handle so many trades, therefore liquidity providers play a vital role on the FX market. They actually
make the market by being ready to purchase and sell stock regularly and continuously, at the price
quoted. Banks, investment agencies, multinational companies, FX brokers or hedge funds, they can
all act as liquidity providers.
Their customers are, among others, individual traders, small banks or
companies that decided to invest on the forex market.
The market has to be liquid, and the more LPs on the market, the bigger the liquidity, and the costs
of trading the customers have to incur are lower. Low liquidity may result in sudden price changes in
the currency pairs.
How do LPs provide liquidity to the market?
First of all, they enable their customers to purchase and sell instruments using their system, thus making the market more liquid. They also provide higher
stability of the prices and assume a considerable amount of risk, although they can still gain profit on spreads. LPs cooperate with brokers by providing them with liquidity, which allows their customers to buy and sell investment instruments. Brokers act as intermediaries between the traders and LPs. They usually use the services of a few liquidity providers, because in this way they can provide their customers with more competitive prices. Owing to liquidity providers, the market is not so highly volatile.
But in fact we can call every market participant a liquidity provider because providing liquidity means enabling to buy and sell instruments and convert assets into cash quickly and easily at a
quoted price. So the more market participants are present on the market, the quicker and easier is to purchase or sell e.g. currency, and it is not necessary to negotiate prices, because they are so many people willing to buy or sell investment tools, that obtaining the price quoted is not problematic. The presence of liquidity providers on the forex market is significant. They not only make the market, but also ensure the stability of prices and ensure competitive prices and reasonably low transactional costs. The more of them trade on the market, the more liquid and attractive the market is.