Define “Liquidity Provider” and Their Role in Reducing Slippage on an Exchange

A liquidity provider (LP) is an individual or entity that places limit orders on both the buy (bid) and sell (ask) sides of the order book. By continuously quoting prices, they add depth and volume to the book, narrowing the bid-ask spread.

This increased liquidity ensures that incoming market orders can be filled with minimal price impact, thereby reducing slippage for all traders. LPs are essential for efficient market functioning.