One important factor that has sustained the forex market today is the large volume of orders placed at the market daily. These comprise a large volume of buy and sell orders. With a uniform volume of buy and sell orders coming into the market at different times, the broker is able to execute them without significantly impacting the market price. The slippage is reduced, too, when the orders can be executed at a close range. 

This work has therefore examined in detail the major reasons why liquidity solutions are very important in the forex market today. 

What is liquidity in Forex?

Liquidity is the balance between the supply and demand of a given currency pair in the market today. It borders on the ease at which traders can buy or sell various assets in the market today.

The role of brokers, for instance, is to match buyers with sellers, and they can only execute these orders effectively when there is a fair balance between the transaction volume. Once there are enough buyers to match the pending sell orders, we say the market has enough liquidity, but when there are difficulties in executing a sell order due to a lack of buyers, we consider the market as facing a liquidity crisis. 

Why are liquidity solutions important in Forex today? 

Forex trading allows traders to buy and sell different currencies and other valuable assets in the market. While some are buying, others are selling. This is always very necessary to sustain the market. Whenever there are no longer enough buyers to match the selling orders, the market will fall into a deep liquidity crisis. This will make it difficult for the brokers to execute the pending sell orders since there are not enough buyers to receive them. 

The number of sellers needs to match the buyers at all times to solve the liquidity crisis in the market. Otherwise,  the market would be termed illiquid. 

Brokers who suffer liquidity crises find it difficult to execute the trader’s orders at the exact market price at which they have been placed. This is why it is important to trade with FCA regulated trading brokers whose various trade executions are monitored.  

Another important reason why liquidity is important in forex is that without sufficient liquidity, investors will experience serious difficulties in converting their purchased assets into cash. 

Major liquidity providers in Forex Market today

There are four broad divisions of liquidity providers in the forex market today. They have been discussed below:

  • Tier one liquidity providers: The tier liquidity providers consist of international banks, Central Banks, commercial banks, and other investment banks across the globe. This category of liquidity providers offers direct market pricing for various currency pairs using the electronic communication network (ECN). The ECN brokers obtain their liquidity from these sources using the same network too. Hence, there is hardly a major liquidity crisis using the ECN brokers today. 
  • Market Makers: This covers the large investment companies and other brokerage firms that buy and sell the different financial assets traded at the market at the nearest public price. They obtain their liquidity from tier 1 brokers. They are called market makers because they offer to traders at their set prices which is direct from the direct market pricing while using the electronic communication network. 
  • Intermediate Liquidity providers: These refer to Hedge funds, foreign investment managers, and Mutual funds that contribute a large volume of liquidity to the market. 
  • Minor liquidity providers: These refer to small-scale investors such as retail traders and other high-net-worth individuals with large capital investments in the forex market.