What is liquidity?
Liquidity is a financial term that shows how easily and quickly an asset can be exchanged for its monetary equivalent. As an example, consider two different areas in terms of liquidity: the real estate market and the Forex currency market. Selling a property, a house or a plot of land, can take days, weeks or even months until a suitable buyer is found and the deal is concluded. In the forex market, for example, when trading US Dollar vs. EURO , a deal can be completed in minutes or even seconds.
Markets with high liquidity can absorb large trades without the price malaysia number data going down. Therefore, using liquid markets instead of illiquid ones is a powerful way to trade effectively.
Who can be a liquidity provider?
A provider can be anyone who can offer one of the most important components of the market: liquidity. In the traditional stock market, liquidity is provided by market makers, which include investment firms and major trading firms, institutional investors such as large banks or hedge funds that trade huge volumes of assets. These entities provide the market with the ability to immediately execute a transaction without waiting for the counterparty to accept the trader's offer to buy or sell an asset.
In most cases, liquidity providers are fully regulated and supervised by the government and operate transparently, following established requirements and laws.
Providers generate liquidity by offering positions against traders' market orders. They may appear to be losing money by accepting the offered price, but even a small loss is factored into their strategy and plays a role in the long run due to the huge trading volumes.