What is a Liquidity Provider?

The Liquidity provider (LP) is the market maker in the market. If the trader sells, the LP will buy, and if the trader buys the LP is willing to sell to the trader.

Why do we need a Liquidity Provider?

A market is made possible by buyers and sellers. If you sell and there is no buyer, the order cannot be matched. The opposite is true for the buying direction if we want to buy but no one is selling to us, the trading cannot happen. If we simply wait for buyers and sellers to match orders without the need for liquidity providers - execution will take place very slowly, not as quickly as it is now, simply for buyers and It is difficult for sellers to match orders perfectly.

What does the Liquidity Provider live by?

Like the house, first of all, they will live on traders' losses. Traders lose their profits, traders lose money

Their second source of life comes from the spread, which is the difference between the bid and ask price. This spread fluctuates more or less depending on the popularity of the trading product. For example, the very popular currency pair forex is ERUSD, the spread is very low because the large volume of trading will help LP make a lot of money. On the contrary, pairs with few traders have high spreads.

Usually, as an LP Tier, they will have an extremely large customer base, and they easily make money through internal hedging. For example, trader A trades 1 lot buy EU, trader B trades 0.3 sell EU, trader C trades 0.7 sell EU ==> This LP will combine into 1 buy EU hedge lot and 1 EU sell the lot, so they are no longer risky. furthermore, and they spread all of these orders. So, the larger the LP, the more money you can earn with less risk.

What should traders pay attention to?

Traders are best to choose floors that have a lot of liquidity providers behind, as they often have low spreads, faster execution speed, and less likely to play badly.

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