Market liquidity is one of the most significant elements in the world of trading. It enables transactions to become profitable, flow easily, and for pricing to become more competitive. The greater liquidity a financial market makes, the better it is for traders and investors. The market liquidity of Forex is an exceptional one that no other capital market in the world can ever be equal to it. However, despite the high liquidity in the majors, the minor and exotic currency pairs are still prone to liquidity issues. This is where liquidity providers come in.
Liquidity issues can happen due to unprecedented news events or important economic data releases in the market. These cause the dealing spreads to expand, which then calls for the help of liquidity providers. Before going further into these liquidity providers, let’s take a look at what liquidity is in the Forex market first.
Forex Liquidity
When talking about liquidity in finance and investments, it pertains to how fast investors can turn their investments into cash. In the Forex market, liquidity is the ability of a currency pair to be traded on demand. Major currency pairs such as the EUR/USD, USD/JPY, and GBP/USD are known for their high liquidity.
The exceptional amount of currency market liquidity enables the dealing spread to become competitive and for the market to absorb large orders without affecting anything in it.
Now that you know what market liquidity refers to, here’s some information about the entities that power and boost it:
Market Makers
Market makers act as both the buyer and seller of an exchange rate or asset class in the Forex market. Liquidity providers are important to ensure that the market is protected against volatility and guarantee support for the high volume of transactions. The ease of buying and selling trading assets in the FX market is due to these market makers.
Other participants in the market can also increase liquidity by increasing the volume of their trading transactions. An example of such is central banks, multinational corporations, and retail traders, among others. Moreover, many individuals, organizations, companies, and even governments in the local and international marketplace significantly contribute to market liquidity.
A quick throwback, though: before the proliferation of online trading, only large companies and commercial banks could handle becoming liquidity providers in the forex market. But due to the internet, liquidity providers nowadays can also be online brokers and retail clients worldwide. Other liquidity contributors are hedgers, high-frequency traders, retail Forex brokers, individuals with large net worth, and currency futures market makers.
From the long list of liquidity providers, there are a remarkable few who belong to one group.
Tier 1 Liquidity Providers
Entities that belong to this classification are known to be the market’s top liquidity providers. These are large investment banks that have comprehensive foreign exchange departments. They provide buy and sell quotations for all currency pairs and offer various services such as trading CFDs.
While they can present the tightest spreads for each currency pair they make markets on, they do not just rely on offering or bidding spreads to generate their money. Liquidity providers in Tier 1 also trade positions, which gives them a big chance to make the most profitable trades in the market. The biggest liquidity provider in the market is Deutsche Bank, followed by UBS, Barclays Capital, and Citibank. Top Forex brokers use these liquidity providers to provide traders the best prices and order executions.
