How Do Liquidity Providers Make Money and Are They Market Makers?
Yesterday, I talked about the difference of the true and false or fake ECN/STP brokers. Make sure not to miss these posts, because they are very important for someone like you who wants to make a living through forex trading: The Difference of True and False ECN/STP Brokers
As you have learned from this article, an ECN/STP broker is the one that routes the traders’ orders to one liquidity provider at least, without any human intervention. If that liquidity provider is a well-known and trusted organization like Nomura or Deutsche Bank, then the broker is a true ECN/STP broker that doesn’t manipulate your trades and doesn’t trade against you.
Now, the question is whether the liquidity providers go against you, or they are happy with the spread and swap they make out of your positions? Is the spread and swap the only income source of liquidity providers or they have some other ways to make money? Do good liquidity providers bother to make you lose, the way market maker brokers do?
Liquidity providing and the spread and swap the liquidity providers earn through this service is only one of the income sources that famous liquidity providers have. They offer too many other services and have too many investment activities.
Like a market maker broker, they lose money when you win. However, as they are too big and offer their services to numerous companies and clients, the small losses are always recovered by the profits they make.
More than 95% of the traders lose and so their money stays in the liquidity provider’s pocket. But the difference of a big liquidity provider like Deutsche Bank with a market maker broker is that they are too big and they make much more profit through the services they offer. Therefore, they don’t bother to make retail traders lose.
Even if you make them lose, they still appreciate your business, because the money you transfer to them and stays with them when you take and hold your position will be added to their treasury and they use it for too many other purposes.
At the same time that you buy a currency, they sell another currency to someone else. They buy and sell stocks and shares. They lend money to big investors, other banks and organizations, and even governments, and they earn a lot of profit.
Your money helps them handle all these activities, and they help you trade forex. They handle millions of transactions 24 hours per day and 7 days per week, even when the currency market is closed to retail traders on weekends.
So, it doesn’t make sense for them to go against the traders and make them lose. They usually don’t do it, because they don’t have to. Besides, they are always worried about competition and so they have to offer a better service every second. Just a small mistake can ruin their credit and cause them to lose a lot of business. On the other hand, they are closely supervised by the governments and if they make any mistakes, they will have to pay for it badly.
Good luck 🙂