Explain the Role of Liquidity Providers in Reducing Slippage in Derivative Exchanges.
Liquidity providers (LPs), often market makers, place limit orders on both the bid and ask sides of the order book. By continuously quoting prices, they narrow the bid-ask spread and increase the order book depth.
This ensures that when a large order is executed, there are sufficient counter-orders available, thus minimizing the price impact and slippage.
