Liquidity providers – the whales that support this planet
In the previous section, we already noted that some activities of market makers are similar to those of liquidity providers (LPs). An LP is a market participant whose business is to earn the spread by providing liquidity to the market, that is, always maintaining orders to buy or sell on both sides of the order book at the same time. Therefore, as in the case of market makers, LPs act as price givers earning the spread.
In two-sided exchange-traded markets, it’s hard to tell the difference between a market maker and a liquidity provider. However, in OTC markets it becomes fundamental.
In an OTC market, a market maker is an entity that has its own clients and quotes the market for them. A liquidity provider normally does have clients which trade directly with them, regardless of whether it’s a small retail client or a large fund. LPs only provide liquidity to an order book – or multiple order...
