In order to explain the role of a trader, broker and a liquidity provider and the relationships between
them, we have to start with the definition of these terms.
A forex broker is an individual who acts as an intermediary between a purchaser and a seller of an instrument and charges the commission if they conclude the transaction. In order to become the broker, one needs to have some capital, a trading platform through which the customers will effect trades and a liquidity partner. In some countries, also a broker license is required.
Brokers also act as an intermediary between the customer and a liquidity provider. LPs are large banks, investment companies or financial institutions which trade large amounts of currency, thus enabling the customer to buy or sell assets. They ensure the market liquidity, stability and competitive prices of instruments.
And the last chain are the traders. These are individuals or companies, who trade in currency pairs on the forex market. In order to gain profit, traders attempt to buy the currency when its price is low, and sell it when its price goes up.
Newbie traders, before they enter a forex market, need to find a broker they are going to trade with.
Such a choice should be made after a detailed analysis of available options. The trader should take into account the commissions on transactions that brokers charge and their hours of operation, since
not all brokers work at weekends, the types of investment tools they offer, and of course the advancement of the trading platform they use. Some traders prefer to cooperate with a few brokers, in case one of them experiences a technical failure or introduces too high margins.
The trader sells to or purchases currencies from a liquidity provider through the broker’s trading
platform, which is a software used to effect trades, which has to be downloaded. Thus all of them are
actually involved in the transactions carried out on the forex market. The more LPs, brokers and traders on the market, the more liquid the market is. However, from time to time, some shocking news or numbers about the forex trading are revealed, and then the market experiences some liquidity issues. But the currency trading has become so popular and allows traders, brokers and LPs to gain so much profit, that with so many people aboard this bandwagon, it is not really possible to stop it. What is more, the forex market is still developing and enjoys increasing popularity.