The currency market, forex, is one of the biggest in the world. The daily volume of trades is about $5 trillion, and it is getting more and more popular. In order to trade on the forex market, an investor needs an Internet connection and any amount of capital to start with. Due to the fact that so little is needed, and the broadband reaches more and more places in the world, an increasing number of traders start to invest in currencies. And this results in better liquidity of the FX market.
However, not only active market participants ensure market liquidity. There are also other LPs, including Tier-1 liquidity providers, which are large financial institutions, investment corporations, and banks. One of the biggest ones is Deutsche Bank. There are also smaller companies, hedge funds and brokers that provide liquidity to the FX market.
Why are LPs important and how they make the market?
First of all, they contribute to the fact that the market is liquid, which is significant for the popularity of currency investments. It allows market participants to effect profitable trades and makes the trades go smoothly and easily, at competitive prices. If the assets are liquid, it means they can be easily and quickly sold, and this contributes to the attractiveness of forex market for investors. Currently, on the forex market, the most liquid currency pair is American dollar against Euro, but the other pairs are also popular.
Liquidity providers make the market since they make exchange rate quotations for traders. They increase the trading volume and help brokers to acquire more and more customers. Their task is to act both as a purchaser and seller of a particular investment tool or exchange rate. LPs also contribute to the stability of the market because they take positions in currency pairs on a regular basis. Sometimes they also act on behalf of their customers, effecting trades for them and thus make the market more liquid.
There is also a specific type of liquidity providers called “Over The Counter” LPs, who usually operate round the clock and cooperate with professional and non-professional business partners, who submit the inquiries to them via the OTC LP’s dealing desk.