Market Maker vs. Liquidity Provider in Forex

The Forex market is more or less the same as any other financial market in the sense that there are numerous participants represented by different actors. Due to their functions and behaviors during different periods or situations, these actors play an important role in the overall picture. One of these critical roles is performed by Market Makers and Liquidity Providers. Despite having some similarities and providing Forex liquidity solutions, both entities perform quite different functions, work for different parties, and have different primary purposes, as we will see in more detail below.

A brief explanation of market makers and liquidity providers

Whenever we think about an exchange market, the first thing that comes to our minds is the idea of market makers. The term market maker refers to the person or group who is capable of providing quotes to traders looking to open or close positions. These positions are also called “Bids” and “Asks,” which means someone who wants to buy an asset pays the Ask price while the person selling gets the Bid price. It is usually banks or brokerage firms that serve as market makers, but any financial institution can do so as well. In most cases, these institutions are well known for having a large amount of capital, which is why they are able to take a risk in the market. The goal of these companies is to make money from the spread, so they don’t have a specific behavior pattern.

Forex liquidity providers are companies that step in when a market needs liquidity. In the absence of them, traders would have difficulty opening positions due to inability to find someone to buy or sell. A provider of this service may be a bank, a market maker, or an individual who provides it for profit.

A market maker’s and a liquidity provider’s roles

Market Makers are primarily interested in making revenue from the spread. The number of positions they are holding does not matter; what matters is how profitable they can be with them over a period of time. An average trader cannot predict their next move due to their inconsistent behavior, which varies according to different circumstances. When traders are seeking to open or close positions, FX liquidity providers are there to assist. By providing liquidity, they aim to ensure no one misses out on any opportunities.

What are the clients they serve?

A market maker is usually a brokerage that provides liquidity in order to generate revenue by charging a fee on every transaction which is made by their clients with the brokerage. Profitability is the primary goal here, but it will be heavily dependent upon the number of transactions in the market at any given period.

Liquidity providers act as counterparties for large organizations and banks looking to open positions. Their services are billed on a commission basis which means that a certain percentage of the price will be taken for every trade the organization makes with them. Commissions are based on how many transactions have been made. The organization and its liquidity provider can make many trades, so it does not matter how large a position is opened. The commissions involved in opening positions are usually pretty low, as larger organizations typically have much better conditions (better spreads, more contracts) when dealing with liquidity providers.

By increasing activity and providing a better trading environment, Forex’s market makers and liquidity providers help improve market conditions. Nevertheless, neither one can be controlled or predicted by the average trader. Knowing how these participants work will help you understand the market fully.

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