Define “Liquidity Provider” and Their Role in Narrowing the Bid-Ask Spread

A liquidity provider (LP) is an entity, often a market maker, that places both buy (bid) and sell (ask) orders in the order book. By continuously quoting prices on both sides, they increase market depth and competition.

This competition forces the bid and ask prices closer together, thus narrowing the spread and improving the efficiency of the market for all participants.