In this article, we draw on our experience as an institutional liquidity provider, to shed some light on the critical role they play in the global financial market. We aim to cover the definition of a liquidity provider, the different types and markets they operate in, the benefits they create, and their crucial role in helping markets run smoothly.
What is a Liquidity Provider?
As the name suggests, a liquidity provider is an essential intermediary that provides ample access to liquidity, allowing clients to trade in financial markets and operate effectively. Their clients often include:
- Retail brokers
- Hedge funds
- Asset managers
- Proprietary trading houses
- Family offices
- Tier 2/3 Banks
Different Types of Liquidity Providers
A liquidity provider can come in many different forms based on geographical focus, specialisation, risk management or regulations, to name a few. They could also concentrate on specific market areas, such as foreign exchange (FX), bonds, equities, and commodities.
Liquidity providers are commonly split into two tiers:
Tier 1 – A Tier 1 liquidity provider is a large financial institution such as a bank or a hedge fund, providing direct market access and deep liquidity. They often service large clients due to the high price tag and strict criteria clients must fulfil to partner with them. However, given their size and wide range of services (including commercial banking, investment banking and money lending), Tier 1 LPs are firmly at the top of the liquidity provision chain with almost unlimited access to markets.
On top of offering unmatched market depth, many Tier 1 LPs also act as market makers, meaning they quote both buy and sell prices for a range of instruments. They also benefit from global infrastructure and low-latency execution, operating in highly regulated environments so they are a trusted choice.
Tier 2 – Tier 2 liquidity providers, also known as prime-of-primes, act as an intermediary between institutional clients and brokers, and Tier 1 liquidity. They leverage their prime broker relationships to connect smaller institutions to high quality liquidity without the need for direct relationships or such large capital requirements. Some benefits of partnering with a Tier 2 liquidity provider include:
- Aggregated pricing: In pooling quotes from multiple Tier 1 providers, Tier 2 LPs are often able to deliver tight spreads and competitive pricing.
- Customised solutions: Tier 2 LPs frequently offer a variety of other tailored solutions, such as risk management tools.
- Lower barriers to entry: Smaller or emerging institutions may not meet the strict criteria required to partner with a Tier 1 LP. Tier 2 LPs provide access to deep liquidity without such barriers to entry.
What Role Do Liquidity Providers Play?
Liquidity providers play several essential roles in the financial markets. Some of the prominent roles they play include:
- Helping to create stable markets through buying and selling – continuously quoting both buy and sell prices helps to prevent large price swings and reduce volatility.
- Increasing market access – making it possible for a wider range of clients to trade efficiently, ranging from retail brokers to hedge funds.
- Enabling price discovery – helping to ensure that prices reflect the true value of an asset.
- Helping to reduce transaction costs – offering tighter spreads and consistent pricing can help to lower the cost of trading for both institutional and retail clients.
iSAM Securities as a Tier 2 Liquidity Provider
iSAM Securities falls into the Tier 2 liquidity provider category, with access to deep, robust liquidity sourced from Tier 1 liquidity providers. We offer bespoke liquidity solutions across forex, precious metals, energy and indices with a focus on speed, scalability, analytics and security.
Our advanced infrastructure leverages the same proprietary technology used by our hedge fund parent company, iSAM, and is designed to serve clients that require low-latency execution and tailored pricing. Alongside our technology, we offer 24/5.5 service through our diverse team of experts, providing high-quality all-around solutions.
Key Takeaways
In conclusion, institutional liquidity providers are indispensable to the global financial ecosystem, acting as intermediaries that ensure markets remain liquid, stable, and efficient. By serving diverse clients—such as banks, hedge funds, and brokers—and specialising in areas such as forex, they facilitate smooth market operations through roles like price discovery, transaction cost reduction, and increased market accessibility.
Contact a team member to learn more about our liquidity solutions.
1iSAM Securities (UK) Limited, iSAM Securities (HK) Limited and iSAM Securities (Global) Limited, iSAM Securities Limited and iSAM Securities (USA) Inc. are together “iSAM Securities”.
