Lesson 5 of 771% Complete

Introducing Interbank & Liquidity Providers 🏦

Beginner12 min2025

Your spread is a tax on ignorance. When you pay 2 pips to enter EUR/USD, the Interbank Market is paying 0.1 pips. That 1.9-pip difference? Your broker's markup for connecting you to Tier 1 Liquidity Providers. Understanding the Interbank structure isn't academic—it's profit optimization.

Welcome to Lesson 4

You learned the Forex hierarchy: Tier 1 (Interbank), Tier 2 (Dealers), Tier 3 (Retail). But here's what beginners don't understand:

Where does your broker's price ACTUALLY come from? And why does it matter?

The Professional Difference: Retail traders choose brokers based on "lowest spread" advertising. Professionals choose based on Liquidity Provider depth and execution model transparency. They ask: (1) How many Tier 1 LPs does the broker aggregate? (2) Is it Market Maker (conflict of interest) or ECN (no conflict)? (3) What's the TOTAL cost (spread + commission)? Understanding Interbank structure = choosing the RIGHT broker, not the CHEAPEST.

Lesson Chapters

1Defining the Interbank Market

The Interbank Market is the apex of Forex—the exclusive wholesale network where the world's largest banks trade currency directly with each other.

What is the Interbank Market?

Definition: A decentralized global network where Tier 1 commercial banks trade currency peer-to-peer in massive volumes

Not a Physical Location:

  • No trading floor (like NYSE)
  • Electronic network (via Reuters, EBS, Bloomberg terminals)
  • 24/5 operation

Who Participates:

  • J.P. Morgan Chase
  • Citibank
  • Deutsche Bank
  • UBS
  • Goldman Sachs
  • HSBC
  • Barclays

Defining Characteristics

1. Wholesale Volume (Massive Size)

Typical Trade Sizes:

  • Minimum: $10 million
  • Average: $100 million - $500 million
  • Large: $1 billion+

2. Best Pricing (Tightest Spreads)

Interbank Spreads:

PairInterbank SpreadRetail SpreadDifference
EUR/USD0.1 pips0.8-2.0 pips8-20x higher
GBP/USD0.2 pips1.0-2.5 pips5-12x higher

Why So Tight:

  • Massive volume (competition)
  • No markup (peer-to-peer)
  • Credit relationships (trusted counterparties)

3. Credit Relationships (Access Based on Trust)

Why Retail Can't Access:

  • ❌ No Tier 1 credit rating
  • ❌ Insufficient capital ($10M+ minimum trade)
  • ❌ No interbank relationships

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2The Concept of Liquidity

Liquidity is the lifeblood of Forex—the single most important feature determining your trading experience.

What is Liquidity?

Definition: The ease with which an asset can be bought or sold without significantly affecting its price

High Liquidity vs. Low Liquidity

FeatureHigh LiquidityLow Liquidity
SpreadsTight (0.5-1.0 pips)Wide (3-10+ pips)
SlippageMinimal (fill at requested price)High (fill 5-10 pips worse)
ExecutionInstant (milliseconds)Delayed (seconds, or rejection)
CostLow ($5-$10 per Standard Lot)High ($30-$100+ per Standard Lot)

Real-World Liquidity Examples

Example 1: EUR/USD During London/NY Overlap (High Liquidity)

Conditions:

  • Time: 9 AM EST (both hubs active)
  • EUR/USD spread: 0.6 pips
  • Order: Sell 10.00 Standard Lots ($1 million)

Execution:

  • Fill time: Instant (20ms)
  • Fill price: 1.08500 (exactly as requested)
  • Slippage: 0 pips
  • Cost: 0.6 pips × $10/pip × 10 lots = $60

Example 2: EUR/USD During Asian Session (Low Liquidity)

Conditions:

  • Time: 11 PM EST (Asian dead zone)
  • EUR/USD spread: 2.5 pips
  • Order: Sell 10.00 Standard Lots

Execution:

  • Fill time: 300ms (delayed)
  • Fill price: 1.08485 (1.5 pips slippage)
  • Cost: 2.5-pip spread + 1.5-pip slippage = $400

Same trade, 6.6x cost difference due to liquidity!

Pro Tip

Professional Liquidity Rule: Never trade when spread is more than 20% of your target. Scalping for 10 pips with 3-pip spread = 30% cost (unviable). Swing trading for 200 pips with 3-pip spread = 1.5% cost (acceptable). Liquidity optimization can improve profitability by 30%+ without changing strategy.

Apply What You've Learned — Master Accumulator Compounding in Action

Compare trading costs during high vs low liquidity periods on a demo account

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3Liquidity Providers

Liquidity Providers (LPs) are the Tier 1 institutions that GUARANTEE liquidity exists by continuously quoting buy/sell prices.

Who Are Liquidity Providers?

Primary LPs (Tier 1 Banks):

  • J.P. Morgan Chase (largest FX dealer globally)
  • Citibank
  • Deutsche Bank
  • UBS
  • Goldman Sachs
  • HSBC

Market Share:

  • Top 5 LPs: ~50% of global Forex volume
  • Top 10 LPs: ~75% of global Forex volume

What Do Liquidity Providers Do?

1. Continuous Quoting (24/5)

LP (J.P. Morgan) quotes EUR/USD:
- Bid: 1.08500 (willing to BUY at this price)
- Ask: 1.08502 (willing to SELL at this price)
- Spread: 0.2 pips

This quote is ALWAYS available (24/5)

2. Order Matching (Facilitating Trades)

Scenario: Hedge Fund wants to sell $500M EUR/USD

Step 1: Hedge Fund contacts LP (Citibank)
Step 2: Citi finds buyers (other banks, funds)
Step 3: Citi matches $500M sell with $500M buy
Step 4: Trade executed, both sides filled

3. Risk Absorption (Taking Opposite Side)

When no immediate match exists, LPs hold the position temporarily and manage the risk.

How LPs Profit

Revenue Sources:

1. Spread Income:

  • Buy at Bid: 1.08500
  • Sell at Ask: 1.08502
  • Profit: 0.2 pips per $100M = $20,000

2. Volume (High Turnover):

  • Execute $50 billion daily
  • 0.1-pip average spread
  • Daily profit: $5 million+

Understand LP Networks

Learn how your broker connects to multiple Liquidity Providers for best pricing

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4Market Makers vs ECN

Retail brokers use two models to connect you to Interbank liquidity. Your choice dramatically impacts costs and execution.

Model 1: Market Maker (Dealing Desk) 🎰

How It Works:

Broker = Your Counterparty

  • You buy EUR/USD → Broker sells to you
  • You sell EUR/USD → Broker buys from you

Characteristics:

FeatureMarket Maker
PricingFixed or wider spreads (2-3 pips typical)
CommissionUsually $0 (profit from spread)
Conflict of InterestHIGH (broker wins when you lose)
ExecutionInstant (broker is counterparty)

Pros:

  • ✅ Simple (one spread, no commission)
  • ✅ Instant execution (usually)
  • ✅ Good for beginners

Cons:

  • ❌ Conflict of interest (broker bets against you)
  • ❌ Wider spreads (2-3 pips vs. 0.8 pips ECN)
  • ❌ Requotes during wins

Model 2: ECN/STP (No Dealing Desk) 📡

How It Works:

Broker = Intermediary (Router)

  • You place order → Broker routes to LP pool
  • LPs compete → Best price selected
  • Order filled at best available Interbank price

ECN Structure:

Your Order: Buy EUR/USD
  ↓
Broker's ECN Aggregator
  ↓
LP 1 (Citi): 1.08505 Ask
LP 2 (JPM): 1.08502 Ask  ← Best price
LP 3 (UBS): 1.08507 Ask
  ↓
Order filled at 1.08502 (JPM's quote)
Broker adds commission ($6 per lot)

Characteristics:

FeatureECN/STP
PricingVariable spreads (0.5-1.5 pips typical)
CommissionYES ($3-$7 per Standard Lot)
Conflict of InterestLOW (broker profits from volume)
ExecutionUltra-fast (direct to Interbank)

Pros:

  • ✅ No conflict (broker doesn't trade against you)
  • ✅ Tightest spreads (0.5-0.8 pips during peak)
  • ✅ Honest execution (no games)

Cons:

  • ❌ Commission charged ($6-$7 per lot)
  • ❌ Variable spreads (widen during news)
  • ❌ More complex

Total Cost Comparison

Scenario: 1.00 Standard Lot EUR/USD Trade

Market Maker:

  • Spread: 2.5 pips = $25
  • Commission: $0
  • Total Cost: $25

ECN:

  • Spread: 0.6 pips = $6
  • Commission: $6
  • Total Cost: $12

Winner: ECN saves $13 per trade

Over 100 Trades:

  • Market Maker: $2,500 total cost
  • ECN: $1,200 total cost
  • Savings: $1,300 (52% lower cost)

Compare Broker Models

Test both Market Maker and ECN execution on demo accounts to see the cost difference

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5Summary, FAQs & Quiz

Summary

Key Principles (0/3)

Interbank Market
Top tier of Forex (Tier 1 banks only), Wholesale trading ($10M+ minimum), Best pricing (0.1-0.2 pip spreads), Credit-based access (retail excluded)
Liquidity Providers
Tier 1 banks (JPM, Citi, Deutsche, UBS), Continuous quoting (24/5 bid/ask prices), Risk absorption (guarantee execution)
Liquidity Impact
High liquidity: Tight spreads, no slippage, instant fills, Low liquidity: Wide spreads, high slippage, delayed/rejected fills, Trade during: London/NY overlap (highest liquidity)

Broker Models:

Market Maker:

  • Counterparty to your trades (conflict of interest)
  • Wider spreads (2-3 pips), no commission
  • Good for: Beginners, swing traders

ECN/STP:

  • Routes to LP pool (no conflict)
  • Tight spreads (0.5-1.5 pips) + commission
  • Good for: Scalpers, day traders, professionals

Frequently Asked Questions

Q1: Can retail traders become Liquidity Providers?

No—absolutely impossible for retail traders.

Requirements to be an LP:

  • ✅ Tier 1 bank status (creditworthiness rating)
  • ✅ Billions in capital ($10B+ typical)
  • ✅ Interbank credit lines
  • ✅ Risk management infrastructure

Q2: Why do Market Makers sometimes offer zero-spread accounts?

It's marketing, not generosity—there's ALWAYS a cost.

Three "Zero Spread" Models:

  • Hidden commission ($10 per lot)
  • Markup on other costs
  • Bet against you (MM profits from your losses)

Professional Reality: "Zero spread" = cost hidden elsewhere. Always calculate TOTAL cost (spread + commission).

Quiz

Which institution guarantees the market's high liquidity by continuously quoting both buy and sell prices for currency pairs?

Answer:

Correct Answer: Liquidity Providers (Tier 1 Banks) - Liquidity Providers guarantee liquidity by continuously quoting bid/ask prices 24/5. Banks like J.P. Morgan, Citi, and Deutsche Bank stand ready to buy or sell massive volumes instantly, creating the liquidity that allows your broker to fill your order in milliseconds.

Which execution model has a LOW conflict of interest because the broker routes the order externally?

Answer:

Correct Answer: ECN (No Dealing Desk) - ECN has LOW conflict of interest. The broker acts as intermediary—routing your order to a pool of Liquidity Providers and earning commission. Broker profits from VOLUME, NOT from your losses.

In the forex market, the term 'slippage' is most likely to occur under conditions of:

Answer:

Correct Answer: High volatility and low liquidity - Slippage occurs during high volatility and low liquidity. When volatility spikes (major news) and liquidity is low (Asian session, exotic pairs), spreads widen dramatically and orders can't fill at requested prices.

Why can retail traders NOT access the Interbank Market directly?

Answer:

Correct Answer: Because retail traders do not meet the massive capital and credit requirements - The Interbank Market requires: (1) Tier 1 bank credit rating, (2) $10M+ minimum trade size, (3) Established credit lines with other Tier 1 banks, (4) $10B+ capital base.

What is the PRIMARY way brokers with ECN/STP models make money?

Answer:

Correct Answer: By charging commission per trade (volume-based revenue) - ECN/STP brokers make money by charging commission per trade. Typical: $5-$7 per Standard Lot round turn. This aligns interests—broker wants you to succeed (trade more), you want best execution.

🚀 Ready to experience ECN liquidity? Use our exclusive link to open a demo account with a multi-LP ECN broker!

Proceed to Lesson 5: Forex Market Sessions & Trading Hours

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Call to Action

Understanding your broker's connection to Interbank liquidity is CRITICAL for professional trading.

Compare Broker Execution Models

Open demo accounts with both Market Maker and ECN brokers. Execute identical trades and compare total cost, execution speed, slippage during news, and requote frequency. See which model optimizes YOUR strategy.

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Prerequisites

Before studying this lesson, ensure you've completed:

Ready to understand Interbank liquidity? Knowing how LPs work helps you choose the right broker and optimize trading costs.

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