Who are liquidity providers?
A core liquidity provider is like a middleman in the securities market. In short, they are the ones you can or may talk to in place of the buyer or seller. These providers will make sure that the buyer or the seller has access to what they represent. They ensure this by buying and selling security shares simultaneously so that liquidity, also known as availability, is continuous, hence their title, core liquidity provider.
Tell me more about core liquidity providers!
If you are interested in learning the way of trading, then you may have heard of the term market maker as well. The term market maker is also the same as core liquidity providers. These providers are primarily financial institutions like banks that buy all unsold shares or finance equity or debts. Later on, they will make a market or assist in securities trading. Now, these banks will make them available to retail investors. ECN brokers usually facilitate the trading transaction from the institutions to the retail investors.
Who can become liquidity providers?
What sets apart a core liquidity provider from a trader’s business model is its independence from securities prices. They do not stop providing liquidity even in a disadvantageous market condition. They buy and sell securities in every market condition.
So now, who are core liquidity providers? Financial entities and institutions like banks, trading firms, and the like can be core liquidity providers if they wish to do so. Their business models may not be all the same, but they can serve the market in more than one way. A core liquidity provider’s critical function is to make markets by putting securities on sale at any convenient time and buying more of these securities at the same time.
Let us cite a typical example of a liquidity provider. Once a company goes public, it will need to choose an underwriter to manage this process. Now, this underwriter will directly buy the company’s unsold stocks to resell them later on to massive financial institutions by batches. These institutions will now be the ones to make them available to retail investors.
How vital are core liquidity providers?
As their name suggests, securities would have little to no liquidity. Buyers and sellers will also not be able to buy or sell securities anytime without their help. So, we understand that a provider’s trading role is essential since they give better market price stability and allow on-demand distribution regardless of whether it is just a retail investor or an institutional one.
The sales volumes go higher and higher as they buy more securities while putting some on sale that investors can buy any time without the need to wait for another investor’s decision to sell.
They are also helpful in other markets like commodities. Some companies protect their businesses from potential future price increase or decrease by investing regularly. We now realize that we can core liquid providers also help in hedging. For example, farmers secure their business from future crop price increase and decrease by investing with these providers. The same is also true for other commodity market participants like the companies that process food.
As a conclusion
Core liquidity providers play a massive role in trading. Without these middlemen, there is no liquidity, and stability will not be as stable.