A liquidity provider is a financial entity that increases liquidity on a trading platform by placing numerous limit orders in the order book, thereby maintaining the balance of the market in case a large volume of any financial instrument is bought and sold. Liquidity providers act as intermediaries by continually trading in and out of relatively short-term positions, and they tend to send orders to the marketplace at prices that reflect available information regarding asset prices including the risk associated with transacting and holding that asset. The hallmark of liquidity providers is that they continually provide liquidity in all market conditions, not just when they desire to accumulate or close-out longer-term investment positions.
Liquidity providers are typically large entities in the financial sector such as banks, hedge bonds, large institutional investors, and companies that trade financial instruments on a trading platform. They can act as market makers in a given asset class, owning a significant volume of a companys shares, which enables them to fill buy and sell orders from brokers providing the prices are within a range they consider acceptable. The term "core liquidity provider" is often used to describe financial institutions that act as middlemen in the securities markets, buying large volumes of securities from companies that issue them and then distributing them in batches to financial institutions who then make them available directly to retail investors.
