A firm that quotes for others to trade:its prices are how the book is made.
An institution, typically a bank or a non-bank market maker, that quotes prices at which it is prepared to buy and sell, supplying the liquidity that brokers pass on to clients.
In plain words
A liquidity provider is a firm, typically a large bank or a specialist trading firm, that continuously quotes a price at which it will buy and a price at which it will sell. Those standing quotes are what make it possible for someone else to trade at once.
See it move
Broker and Provider A
Why it matters
A broker’s prices are built from the quotes of the providers it is connected to. Depending on the broker’s model, a client’s order may be passed on to a provider or dealt with by the broker itself, and the providers behind a broker affect its spreads and how orders are filled.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A broker receives quotes for the same pair from three providers at the same moment.
- 1Provider Abid 1.1000, ask 1.1003
- 2Provider Bbid 1.1001, ask 1.1004
- 3Provider Cbid 1.0999, ask 1.1002
- 4Best bid 1.1001 from B; best ask 1.1002 from C
Combining the best of each gives a spread of 1 pip, narrower than the 3 pips that each provider quoted alone.
A common mistake
A liquidity provider is not obliged to quote the same price or the same amount in all conditions. In fast markets providers widen their quotes or reduce the amount on offer, and spreads widen with them.
Check yourself
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Educational information, not investment advice or a recommendation to trade.