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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 🙂



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30 thoughts on “How Do Liquidity Providers Make Money and Are They Market Makers?
  1. Dogan

    I think some brokers dealing with their clients both way. They could be ECN STP broker and money maker as well. If you have micro account you never know when they change their operation to you. As a learner of trading how possible to find out good broker? Instead of using demo account I’m working with small amount of money and 0.01 size of lot. I know you will not give us reliable brokers name. But I think you may give us a list of good Brokers.
    Thanks for your help.

  2. alwin

    Dear Chris,

    Please help me & provide good Liquidity Providers. This information relay helpful so many New fx learner

  3. james

    hi Chris
    I have two questions
    1.can ecn brokers be still market makers
    2.the size of the lot do ecn brokers provide
    thanks for the work of educating us Chris may God bless you

    • Hi James,

      1. Some brokers have both systems, ECN and dealing desk. They place some of the account on ECN, and some others on DD.

      2. 0.1 lot is the minimum lot size true ECN/STP brokers can support.

  4. Nick

    Hi Chris will LuckScout be closed for the holidays?

    • Hi Nick,

      I am travelling during the holidays, but will do my best to keep the site updated.

  5. Maria

    Hi Chris,

    If a broker is a true ECN/STP broker, will they always tell us what their liquidity providers (banks) are? Or is there any true ECN/STP broker that has a company regulation where they should not tell anybody about it?

    • Hi Maria,

      They proudly tell you who their liquidity providers are in case they work with good liquidity providers. If they don’t, then there is something wrong.

  6. Ted

    Another subject demystified!!

    Thank you Chris

    Ted

  7. Mahesh

    Hi Chris,

    Today i received an email from my broker saying they will be reducing the allowed leverage on EUR/CHF due to changing market conditions. Do you think this is odd?

    • How much was the leverage before and how is it now?

      • Mahesh

        Leverage was from 100 to 500 maximum. Now 100.

        • So, probably they were market maker before, but now they have switched to ECN/STP.

    • Ted

      Could that IC…? I’m demo trading with them. I also received the exact same massage. On a demo, liver age is 100:1. Is this significant Chris?

      • These are suspicious activities.

        • EARL

          Hi Chris,

          First to thank you for all your great effort and understanding,
          and second.. Chris, you are right.

          This was an indication of CHF Tsunami after SNB announcement one month later..

          So, guys if your broker is change the leverage,
          he probably use right liquidity provider.

          Regards to all and
          God bless you Chris

  8. Sutivserv

    In your analysis of G/A, you said the price is approaching resistance level @ 1.9183 and if you are in a long position, “you have to be careful”.
    What exactly are you suppose to do at this position in order to be a better trader?

    • You can collect your profit, or move the stop loss to breakeven to be at the safe side. It depends on the risk you want to take. You can risk the profit your position has and leave the trade open maybe to make more profit. It is up to you and is a personal decision.

  9. Nick

    Thank you Chris and enjoy the traveling!

  10. Adam

    Re the GBP/AUD trade, I’m confused why this would have been a valid trade. NZD/CHF daily was dismissed as a trade last week with one of the negatives being because the confirmation candle was too long so the market was deemed overbought; didn’t the GBP/AUD trade have the same characteristics?

    • No. It was formed on the weekly chart and was much stronger. It was the continuation of the upward movement.

  11. Val

    Hi!

    Can you tell me, what is the minimum lot size in units that the liqudity provider can really handle/trade?

    Thank You

    • 0.1 lot is the minimum lot size the big liquidity providers support.

  12. I don’t know if the biggest liquidity providers are honest: http://en.wikipedia.org/wiki/Forex_scandal

  13. Hi, Chris. Still have some doubts about how banks/market makers work. Do they have money in many currency, or convert their currency automatically based on the currency you need. For example, you want to buy CHF, so they convert USD in CHF.

    • They usually have different currencies in their treasury. It doesn’t make sense to convert currencies when someone wants to buy a currency they don’t have, unless they charge the customer a lot to cover the possible losses.

  14. Oh, thanks. It is exactly what I thought? But what if they want to convert their main currency with a currency they don’t have, or what if they have too much foreign currency and what to convert it in local currency? Do they do it with their central bank?

    • The electronic currency can be exchanged with all the banks around the world. The paper currency, they usually do it with central banks.

  15. So does that mean they don’t like scalpers as they don’t hold positions for very long?


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