There are basically two types of liquidity providers forex broker: Tier 1 and Tier 2 liquidity providers.
The Tier 1 liquidity providers are usually large banks with branches on a global scale. This class of liquidity providers is populated by the biggest banks in the world with large forex departments. These banks provide price quotes for all currency pairs and they actually make the markets for forex brokers and retail clients who use the ECN platforms. The Tier 1 liquidity providers usually offer to price to the market maker brokers, who in turn offer some mark-up pricing to their retail clients using the pricing from liquidity providers as the benchmark.
Examples of TIER 1 liquidity providers:
BofA Merrill Lynch
Royal Bank of Scotland
The liquidity companies of Tier 2 operate on the interbank foreign exchange market. They work as marketers who offer retail customers a price on a retail desk. Market manufacturers are ready to sell or buy an asset at an official price on a regular and ongoing basis, according to the definition of the US Securities and Exchange Commission. In relation to the foreign exchange market, the market functioning of monetary pairs is performed by a “market maker.” Most forex brokers today are fully operating market makers as well as several banks that offer business and investment banking services.
How are marketers gaining cash? They get their money out of the price difference between the offer price and the currency pair’s demand price. This is called the spread and is taken from the retail traders ‘ accounts as soon as the trade orders are carried out. They also profit from the loss of business in the market by acting as counterparties.
Small traders generally trade forex with a few hundred or several thousand units of any currency. This is not sufficient to keep the desired cash on the forex market. The role of market manufacturers is stressed here. Their market operations greatly improve market liquidity. It is possible to describe market manufacturers as intermediaries between retail traders and large banks which function as market liquidity providers. Increased liquidity results in cheaper trade costs, reduce spreads and improves volumes of trade.