What is Liquidity Provider Roles in the Currency Market? 

Greater liquidity in the market enables you to sell or buy goods quickly and possibly greater in the volume of transactions.   

For the forex market, liquidity is needed as it is one of the largest and most liquid markets in the world. Those who provide liquidity to the forex market is often called liquidity providers and act as a professional market marker that makes exchange rate quotations to others.   

As a reputed and trusted liquidity provider, Doo Clearing continues to expand its liquidity offerings and update its infrastructure, firmly establishing itself as a competitive liquidity provider that remains committed to providing reliable, advanced, and secure systems to its diverse and ever-growing community of primary and regional dealers, professional trading groups and other institutional traders around the world.   

In this article, you will learn more about the main market participants, liquid currency pairs, and the role of liquidity providers in the forex market.   

Forex Market Participants  

Central Banks, largest investment firms, multinational commercial companies, hedge funds, mutual funds, insurance companies, and retail forex brokers are among the participating entities in forex trading.  

Banks: Bank is the major and larger currency exchange market participants that play an important role in the currency trading market. Billions of dollars are traded every single day, and they have a great impact on inflation rates and interest rates.   

Multinational Commercial Companies: Carrying out the financial activities seeking currency exchange to pay for goods and services are the roles of multinational commercial companies in forex trading. Even they have little influence on the currency rates, but they can contribute fairly well in the forex market with unpredictable outcomes.   

Central Banks: The roles of this market participant are to trying and controlling the currency supply, interest rates, and inflation rates. They can use their often-substantial forex reserves to stabilize the market. The stabilization strategy of most of these central banks is focused on the goal of buying when the currency exchange rate is low and to sell the currency when the rate goes high. Central Banks do not suffer from bankruptcy compared to other currency exchange market participants because of their stocked forex reserves.   

Hedge Funds as Speculators: The hedge fund comprises of private investment fund charged with a performance fee that is limitedly open to a few qualified investors to join. Hedge funds have an ability to control equity of billion dollars and have the capacity to borrow for billion dollars more and can overwhelm the Central Bank’s intervention in supporting any currency.   

Financial Investment Management Firms: The major work of these firms is the management of large accounts like pension funds and endowments. The management is done on behalf of the customers, and these financial investment firms make use of the currency trading market to facilitate money transactions in foreign securities.   

Retail Forex Brokers: The retail forex brokers are those market participants in forex trading who are responsible for only 2% of the total forex market trade. Many forex brokers that don’t have appropriate experience in forex trading can be a vulnerable target to forex scams. Basically, there are two types of retail brokers market participants in forex trading offering speculative trading; retail forex brokers and market makers.   

Non-bank Forex Companies: These non-bank forex companies offer currency exchange and international payments to private individuals and companies. These are also called forex brokers sometimes. But there is a little distinction as these non-bank forex companies do not offer any kind of speculative trading. These Forex market participants exchange currencies with payments that mean there is physical delivery of currency to a bank account.   

Money Transfer or Remittance Companies: Money transfer or remittance companies are known for performing high-volume low-value transactions generally by migrants back to their home country. The largest markets for these kinds of transactions are India, China, Mexico, and the Philippines. Meanwhile, the biggest known currency exchange market participants in this category are the largest and best Western Union that has about 345,000 agents globally.   

Major Liquid Currency Pairs   

A trader stands a better chance of making profitable trades in currency pairs that have higher liquidity. Higher liquidity in a currency pair is reflected in how tight the bid or offer spread is and how fast and by how much the market moves in reaction to a large order.   

The most liquid currency pair on the forex market is the Euro quoted against the U.S. Dollar or EUR/USD. The bid or offer spreads on this currency pair can range from 0.25 to 1.8 pips.   

Other major currency (highly liquid) pairs to be aware of:   

USD/JPY: The spread on this currency pair is typically between 0.5 to 2.5 pips   

GBP/USD: Dealing spreads in this pair is between 2 to 4 pips wide   

AUD/USD: For this currency pair, the dealing spread is generally between 2.5 and 4.5 pips   

USD/CHF: This currency pair spreads are typically 2.5 to 5 pips wide   

Other currency pairs that deserve mentioning due to their substantial trading volumes or strategic trading interest are NZD/USD, EUR/GBP, EUR/JPY, and USD/CAD.   

Role of Liquidity Provider   

The presence of liquidity is one of the most critical factors that make transactions flow easily and pricing competitive. Meanwhile, the liquidity provider roles are to ensure greater price stability by taking positions in currency pairs that can either be offset with another market maker or added to the market maker book to be liquidated at a later time. Many forex market makers also monitor orders and call levels for clients, and they stand ready to execute market orders on their behalf.   

The top liquidity providers in the forex market are known as Tier 1 liquidity providers. Tier 1 liquidity providers consist of the largest investment banks with extensive forex departments, providing buy and sell quotes for all the currency pairs they make markets in and often offer other services to their clients.   

Most Tier 1 liquidity providers offer the tightest spreads for the currency pairs they make markets on, and they often trade positions to make money instead of just relying on the bid or offer spread to make their money. This gives the Tier 1 provider a significant opportunity to make profitable trades.   

Doo Clearing offers a comprehensive liquidity clearing system that includes modules such as liquidity access, quotation aggregation, liquidity distribution, risk management, full MetaTrader 4/MetaTrader 5 systems integration, reporting, and system health monitoring.   

For more information, please contact our expert support team:   

London Office   

Email: [email protected]   

Website: www.dooclearing.co.uk   

Hong Kong Office   

Email: [email protected]   

Website: www.dooclearing.com