Liquidity Providers Or Market Makers

In the forex exchange market, there are a lot of players. One of the most important of these role takers are the liquidity providers, also known as the market makers. These are usually large commercial banks as well as other financial institutions. In today’s forex trading market, the largest market maker is the Deutsche Bank.

 In this article, all the information regarding them have been discussed in a very well detailed, concise and understandable manner. Read on to learn why a stock market cannot be the same without the market makers.

Roles of Liquid Providers in the Stock Market

As aforementioned, the market makers play a very central role in the stock exchange market. They have several roles, including:

• The chief role of market makers is acting as the bridge linking the brokers and traders. They do this by creating an enabling environment within which the brokers can sell and the buyers can purchase forex.

This is important as it plays a big part in increasing the overall liquidity in the forex market. A higher liquidity means the spread is driven down, and thus contributing immensely to low costs of trading.

• Another very significant undertaking of the market providers is shielding against fluctuations in volatility on the forex market. This means that they often have to employ protective strategies so as to maintain price stability in the market, thus providing protection to their clients against certain market forces that may lead to massive losses.
• The fact that liquidity providers commit themselves to creating market for assets by acting both as a buyer and a seller makes them very central to the functionality of the stock exchange.

This is because in this way, they ensure there is a constant flow of capital in the market, and thus boost trade volumes. This then encourages investors to pump in their funds and as a result, overall market performance is improved.

• Since most market makers are commercial banks, they also indirectly play a big role in providing as well as keeping the currency used in trading at the stock exchange.

This is because some of the traders and brokers use money borrowed from these banks to trade in the market, and also remit the same to the banking institutions for safe keeping on closure of deals.

How Liquidity Providers Earn Money

You must be wondering by now, what is in it for them? How do the market makers earn money to stay afloat? This is a very crucial question and is answered in the following paragraphs:

• Market makers mainly make money by trading in stock. They do this by purchasing stock at a low price and then reselling it at a higher price to get a profit. And since they trade in large volumes, the profit they make at the close of business is quite an amount.
• They are also given liquidity rebates by communications networks through which shares are sold or bought from every posted offer or bid.