Liquidity: What Is It & Why Is It Important?

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Written By
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Written By
Royston Wild
Royston is an experienced investor and writer. His expertise includes stock recommendations through to commodities, forex, and macroeconomic news. Royston's background includes roles as a stocks and commodities reporter, and editor of forex coverage at Shares Magazine.
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Edited By
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Edited By
James Barra
James is an investment writer with a background in financial services. He has worked as a management consultant, where he delivered large-scale operational transformational programmes at some of Europe's biggest banks. James authors, edits and fact-checks content for a series of investing websites.

The term liquidity refers to the ease and speed with which an asset can be bought or sold without causing a significant change in its price. Brokers with deep liquidity can help short-term traders minimize costs and reduce risk by being able to open and close positions rapidly.

This guide will explain the role of liquidity providers (LPs) in the financial markets and list brokers with excellent liquidity.

Quick Introduction

  • Liquidity providers are institutions that allow trades to be made quickly and efficiently.
  • They are essentially middlemen between firms that issue an asset, such as a stock, and traders.
  • Choosing a broker with good liquidity can increase profit potential through cost reduction and mitigating risk by facilitating swift position management.

Brokers With Deep Liquidity

These 3 brokers offer good liquidity with competitive prices and reliable order execution:

Founded in 1974, IG is part of IG Group Holdings Plc, a publicly traded (LSE: IGG) brokerage. The brand offers spread betting, CFD and forex trading across an almost unrivalled selection of 17,000+ markets, with a range of user-friendly platforms and investing apps. For 50 years, IG has maintained its position as an industry leader, excelling in all key areas for traders.
Established in Australia in 2010, Pepperstone is a top-rated forex and CFD broker with over 400,000 clients worldwide. It offers access to 1,300+ instruments on leading platforms MT4, MT5, cTrader and TradingView, maintaining low, transparent fees. Pepperstone is also regulated by trusted authorities like the FCA, ASIC, and CySEC, ensuring a secure environment for day traders at all levels.
CFDs and FX are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs.
Swissquote is a Switzerland-based bank and broker that offers online trading and investing. The company has a high safety score and is listed on the Swiss stock exchange. The firm offers a huge range of products, from stocks, ETFs, bonds and futures to 400+ forex and CFD assets. Hundreds of thousands of traders have opened an account with the multi-regulated brokerage. Clients can get started in three easy steps while 24/7 customer support is available to assist new users.

What Are Liquidity Providers?

It is lawful for traders to deal directly with each other. This is known as off the exchange, as transactions are made outside of a centralized financial marketplace.

However, the bulk of trades are carried out on exchanges where market participants trade standardized securities. Exchange-based dealing makes it more straightforward for a buyer to find a seller, or vice versa.

Core liquidity providers – or market makers, as they are also known – play a critical role in allowing these financial exchanges to function.

They act as intermediaries connecting institutions issuing assets, like the London Stock Exchange in share dealing, with traders.

These trading facilitators hold inventories of one or more assets or financial instruments, and stand ready to meet buy or sell orders as they come in. This allows markets to keep moving by ensuring that a buyer or seller can always do business.

Some providers offer liquidity across a wide range of markets while others focus on specific asset classes like stocks, forex, commodities or cryptocurrencies.

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Royston Wild

Different Types Of Liquidity Providers

Core liquidity providers can differ greatly in size, and they tend to be banks, brokerages or other financial institutions. These market facilitators fall into one of two categories: tier 1 and tier 2.

Tier 1

Primary liquidity providers purchase big batches of assets from the institutions that issue them.

Most of these are large banking and financial institutions that have access to large pools of capital. For example, Deutsche Bank and Morgan Stanley are global, leading providers in forex.

Tier 2

Secondary liquidity providers are brokers and smaller financial institutions that act as intermediaries between tier 1 providers and end customers.

Tier 2 providers have partnerships with one or more tier 1 providers. The more partnerships a tier 2 provider has, the more aggregated liquidity and market depth they can offer.

Some online brokers act as tier 2 liquidity providers and, when you trade on their platforms, you will buy and sell assets directly from and to them.

Brokers can offer excellent liquidity by partnering with multiple tier 2 providers, or by being tier 2 liquidity providers themselves and partnering with tier 1 providers.

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Royston Wild

IG is a good example of a broker that has a subsidiary liquidity provider, called IG Prime.

Such brokers are sometimes known as retail liquidity providers.

Trading on IG platform
IG Trading Platform


Entities known as supplementary liquidity providers (SLPs) also work to provide liquidity across financial markets. Like core liquidity providers, they provide depth across a wide range of different asset classes.

Unlike market makers – which create liquidity by holding an active inventory of an asset – SLPs increase trading volumes by executing high-frequency, high-volume trades using algorithms.

These are also sometimes known as electronic liquidity providers, not to be confused with ECNs (electronic communications network brokers).

Why Is Choosing A Broker With Deep Liquidity Important?

Picking a broker with high liquidity is important for several reasons:

  • Ease of trading – Investors can enter and exit trades quickly and simply, meaning that the risk of holding a position is greatly reduced.
  • Better price discovery – The existence of a greater number of buyers and sellers leads to more accurate and reliable price information.
  • Reduced risk of slippage – The difference between the expected price of a trade and the actual price is known as slippage, the risk of which is greater when liquidity is low. This is especially important for active, short-term traders.
  • Lower costs – In illiquid markets, finding willing parties for trades can be challenging, resulting in wide bid-ask spreads. Core liquidity providers maintain tighter spreads by supplying a constant flow of buy and sell quotes, profiting from the difference between bid and ask prices when the transaction is completed. Prices they set follow supply and demand, rising with increased buyer interest and vice versa.
Spreads on eToro platform
eToro – bid and ask spreads

Bottom Line

Financial markets require deep liquidity to function efficiently and in a cost-effective manner. To this end, liquidity providers like banks and brokerages provide an indispensable function to the modern-day trader.

Traders should ensure that the platform they select offers high levels of liquidity for their desired asset class.

Tip: Selecting a broker that has partnerships with multiple liquidity providers is a smart way of obtaining the best possible spreads and minimizing the risk of slippage.


How Do Liquidity Providers Work?

Liquidity providers act as intermediaries between the institutions that issue an asset and the customer, such as a day trader.

They increase liquidity by having large quantities of the asset available and selling them to traders when required.

What Types Of Liquidity Providers Are There?

There are two main types of providers. Tier 1 liquidity providers are big banks and corporations that buy the asset from the issuers.

Tier 2 liquidity providers are brokerages and smaller companies that facilitate trading to retail brokers and traders.

Why Is Liquidity Important For Trading?

Liquidity is important because it can help keep costs down for traders. Liquidity providers hold large amounts of an asset, which means it is readily available for trading at a stable price while helping to avoid slippage.

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