Who Provides Liquidity to the Forex Market?
So, what is a liquidity provider in FX? A liquidity provider is a market broker or institution which acts as a professional market maker, working at both ends of the currency transactions.
Several types of market participants provide liquidity to the forex market thereby increasing the forex liquidity volume. These include central banks, major commercial and investment banks, hedge funds, foreign investment managers, forex brokers, retail traders and high net worth individuals.
The top liquidity providers in the foreign exchange market are known as Tier 1 liquidity providers. These consist of the largest investment banks with large forex departments who provide buy/sell quotes for the forex pairs that they make markets in, often providing their clients with a range of other services.
In addition, each financial instrument has a primary market, where all buyers and sellers meet. A liquidity provider will have a preset risk tolerance for the instrument along with how they want to be positioned at any certain time. Depending upon the LP's current holdings, their order book, and current market volatility, these factors will increase or decrease how much liquidity they will provide. For example, in stable market, a LP may increase their risk tolerance and supply more liquidity to the market. In times of high market volatility, a LP may reduce their liquidity to the market.