What is Core Liquidity Provider

A core liquidity provider is an underwriter or a market maker that is a sizable holder of a given security or that facilitates the trading of the security. Core liquidity providers ideally bring greater price stability and distribute securities to both retail and institutional investors.

BREAKING DOWN Core Liquidity Provider

Core liquidity providers are typically firms, institutions or banks that underwrite or provide the financing for equity or debt transactions and then make a market or assist in the trading of these securities. Without their participation, liquidity of the security would decrease and the ability of buyers and sellers to accumulate or dispose of stock would be diminished.

Core liquidity providers can be either the buyer or seller in a transaction. Functionally, they bridge the gap between market participants. They quite literally make a market for an asset by offering up their holdings for sale at any given time while simultaneously also actively buying. This effectually allows a market for a security to function and facilitates higher volume trading. They allow long-term investors to buy or sell stock whenever they want to, without having to wait for another long-term investor looking to do the opposite. By bringing stability to the market for a security, core liquidity providers make it possible for hedging strategies to be effective, such as farmers that hedge against a drop in crop prices and food production companies that hedge against a rise in the cost of ingredients. 

Core liquidity providers send orders to the marketplace at prices that reflect available information regarding asset prices, including the risk associated with transacting and holding that asset. A key characteristic of core 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.

Types of Core Liquidity Providers

Modern markets function best with a diversity of liquidity providers available to facilitate risk transfer and serve buyers and sellers with continuous liquidity during trading.

Banks, financial institutions, and principal trading firms can all be core liquidity providers. The different business models and capabilities of these liquidity providers allow them to serve the market in different ways. For instance, banks with large balance sheets may carry more inventory and be able to facilitate larger transactions in a given asset. PTFs, on the other hand, serve investors by maintaining tighter bid/ask spreads, offering often more attractive or reliable market liquidity, optimizing price discovery across products and asset classes.