Forex broker and liquidity
In the foreign exchange market, a forex broker acts as the best liquidity provider. However, to understand how a Forex broker plays the role of a liquidity provider in the foreign exchange market, one must know the concept of liquidity first.
To understand the concept of liquidity and its relation to a Forex broker in an easier way, one can learn through an example. The theory of liquidity is very much related to the notion of the barter system.
In a barter system, a person exchanges a thing for something else. However, there should be another person who wants the same thing the first person is willing to exchange. Plus, the second person should also be willing to exchange the thing which the first person wants.
A similar thing also occurs in the foreign exchange market. If a trader wants to buy or exchange any currency, they have to find another trader who wants to sell the currency they want and is also willing to take the currency they have. Only when these two conditions are met can the trader perform a trade in the foreign exchange market.
Now, a market is termed a liquid market when it has plenty of buyers and sellers. When an exchange market is liquid, it means that a trader has plenty of options to choose from.
However, a Forex broker is necessary to achieve this liquidity. It is because, without a forex broker platform, traders from around the world cannot meet each other and perform trades or deals.
The liquidity of the market does not depend on the number of traders trading in the foreign exchange market. Instead, it depends on the number of currencies available in the market.
Thus, even if there are only a few traders in the market but they have different types of currencies in large quantities, the foreign exchange market is still liquid. Thus, a forex broker is the prime liquidity provider in the foreign exchange market.