As with any other financial market, the Forex market is filled with market participants represented by different actors. These actors play a vital role in the overall picture due to their functions and behavior during different periods or specific situations. Market Makers and Liquidity Providers serve one of these critical roles. As we will see further on, although both entities have similarities and play a role in providing Forex liquidity solutions, their primary purpose is quite different from each other’s and how they work and for who they work.
Explaining market maker and liquidity provider
The first thing that comes to everyone’s mind when thinking about an exchange market is the idea of market makers. A market maker is someone that provides quotes to traders willing to open or close a position. These quotes are also known as “Bids” and “Asks,” which means that if someone wants to go long, he will have to pay the Ask price while the person selling will get the Bid price. Market Makers are usually banks or brokerage companies, but they can be any other financial institution as well. These institutions typically have a lot of capital, which is why they can afford to take a position on the market. They don’t have a specific behavior pattern, and their goal is to profit from the spread, not from commissions according to different strategies.
Forex liquidity providers are people or entities that provide liquidity to the market by jumping in when needed. Their purpose is fundamental because, without them, traders will find it harder to open positions due to a lack of liquidity (inability to find someone willing to buy or sell). These providers can be banks, market makers, or individuals who provide this service to profit from it.
Purpose of Market Makers and Liquidity providers
The main goal of Market Makers is to make a profit from the spread. It doesn’t matter how many positions they have; what matters is the profitability they can get from them in a certain period of time. Their behavior pattern differs according to different situations, and it’s tough for an average trader to try and predict their next move due to this inconsistency. FX liquidity providers are there when traders need them most to open or close a position. They provide liquidity so that no one would be left without any opportunities due to the lack of liquidity.
For who do they work?
Market makers usually represent brokerages, and they provide liquidity to make money by charging commissions on every transaction made by their clients using the brokerage account. The main goal here is simply making money, but this will depend heavily on how many transactions there are in the market at any given time since commissions are based on the number of transactions, not on the total value of these transactions.
A liquidity provider usually acts as a counterparty for large organizations/banks/central banks who want to open positions in the market. They charge commissions for their services which are taken from every trade made with them by the organization they represent. This commission is based on the number of transactions. Thus, it does not necessarily depend significantly on how large a position is opened since many trades can be made between an organization and its liquidity provider. In addition, this commission is usually much lower than other commissions involved when opening a position, generally because larger organizations generally have much better conditions when dealing with liquidity providers (better spreads, more significant amount of contracts).
In conclusion, Forex’s market makers and liquidity providers improve market conditions by increasing activity and providing a better environment for traders. However, they both have strategies that average traders cannot control or predict. Understanding how these entities work to take advantage of this knowledge and not be left behind due to lack of information.
