Here’s the short answer: market makers are a type of liquidity provider, but they usually have a duty to keep posting both buy and sell quotes. Other liquidity providers may add orders to the market, but they can step back at any time.
If you trade on SGX, this shows up in spreads, slippage, and fill quality. For example, large-cap stocks like DBS, Singtel, and UOB can trade at around S$0.01 to S$0.02 spreads in active hours, while smaller counters can sit at 1% to 3% or more. And in stressed markets, even a S$0.01 spread can move to S$0.05+.
Here’s what I’d keep in mind:
- Liquidity providers add depth to the order book
- Market makers add depth and are often required to keep quoting
- Retail traders usually feel the difference through execution costs
- SGX liquidity is often stronger from 10:00 am to 3:00 pm SGT
- Limit orders can help you control price, especially in thin counters
- Backtests should include spread and slippage, or results can look better than live trading
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Quick Comparison
| Point | Liquidity Providers | Market Makers |
|---|---|---|
| Main role | Add buy and sell interest to the market | Keep both bid and ask quotes on screen |
| Quoting duty | Usually no formal duty | Often yes |
| Can step away in volatile markets | Yes | Less freely, depending on venue rules |
| Where you see them | Shares, FX, OTC, many venues | Often in options, structured products, and some exchange markets |
| What it means for you | More depth can mean better fills | Live quotes can help keep trading moving |
If you want the plain-English version, it’s this: all market makers are liquidity providers, but not all liquidity providers are market makers. And if you trade smaller SGX names or less active products, that difference can hit your order price fast.
Liquidity providers: who they are and how they support trading
Liquidity providers are the firms and market participants that keep trading moving when there aren’t enough natural buyers or sellers on the other side. This group includes banks, institutional electronic liquidity providers (ELPs), and proprietary trading firms. They may work in different ways, but the job is similar: post bids and offers so orders can match with less delay. The result is a market with more depth and, in many cases, better fill quality.
How liquidity providers add depth and cut trading costs
When liquidity providers place orders across several price levels, they add depth to the order book. In plain terms, that means more volume is available at or near the best bid and ask. And that matters for one simple reason: it can reduce slippage – the difference between the price you expected and the price you actually got, especially when you place a larger order.
You can think of it like this: if there are only a few orders sitting in the market, your trade may chew through them and get filled at worse prices. If there’s more volume stacked across the book, your order has more room to land without moving the price as much.
During the market turbulence of March 2020, some SGX stocks that normally traded with a S$0.01 spread saw it widen to S$0.05 or more as volatility rose. That episode was a sharp reminder that execution quality can shift fast when liquidity providers widen their quotes to manage risk.
How retail traders access liquidity providers
Retail traders in Singapore usually reach liquidity providers through brokers and trading platforms. Your broker sends the order to the exchange, where those bids and offers are already resting in the market. That means the broker’s routing and execution quality shape a lot of what you experience day to day, including:
- the spreads you see
- how reliably your orders get filled
- how much slippage you face
For systematic traders running rule-based strategies, those costs don’t stay small for long. They stack up over time and can eat into returns bit by bit.
That leads to the next point: who must keep quoting when markets go quiet? Market makers sit inside this bigger pool, but they’re a narrower group with specific quoting duties.
Market makers: how they quote prices and manage inventory
Unlike broad liquidity providers, market makers often have formal quoting duties. A market maker is a firm or participant that keeps both a bid and an ask price on screen for a security. By staying ready to buy or sell, they help keep quotes live and trades moving.
They make money from the bid-ask spread. And that gap matters even more when markets get thin or when volatility picks up.
How market makers keep trading active during the day
Market makers quote both sides of the market and move those prices as conditions shift. A big part of the job is inventory management. If they build up too much inventory on one side, they tweak their quotes to cut risk.
They also change quotes based on the asset’s volatility and the state of the market. When uncertainty jumps or major news hits, they may widen spreads to shield themselves from sharp price swings. That helps explain why their quotes can still stay visible even when natural order flow starts to dry up.
Where retail traders in Singapore encounter market makers
On the SGX, retail traders most often come across market makers in exchange-traded options and structured products. In these markets, market makers help keep intraday entry and exit prices available, even when order flow gets thinner.
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Liquidity providers vs market makers: key differences
The main difference isn’t whether they add liquidity. It’s whether they have to keep quoting.
The two terms overlap, but they’re not the same. All market makers provide liquidity – but not all liquidity providers are market makers. A market maker is a specific type of liquidity provider with a formal duty to post quotes. A liquidity provider is a much broader group. It includes any participant that adds depth to the order book, even someone placing a passive limit order.
The clearest line between them is obligation. Market makers are often formally appointed to keep continuous bid and ask quotes in the market. By contrast, any systematic trader who places a limit order and leaves it sitting in the order book is also providing liquidity, but that’s a choice, not a quoting requirement.
Differences in role, venue, and obligations
| Feature | Market Makers | Liquidity Providers |
|---|---|---|
| Definition | Designated entities required to quote continuous bid and ask prices | Broad category of participants that add depth to the market |
| Typical Markets | Exchanges and OTC markets | Exchanges and OTC markets |
| Continuous Bid and Ask Quotes | Yes – often a formal obligation | No – voluntary and sporadic |
| Inventory Holding | Actively managed; quotes are adjusted to control inventory | May hold positions for longer durations or based on different strategies |
| Regulatory or Venue Obligations | Often exchange-mandated to maintain fair and orderly markets | Generally none |
What the overlap means in practice
In practice, designated market makers must keep their quotes live, while other liquidity providers can pull back when volatility picks up. On SGX, that can matter a lot. A retail order in a thin counter may run into wider spreads and slower fills if non-designated liquidity providers step away.
For retail traders, this tends to show up in three places: spreads, slippage, and fill quality.
What this means for retail traders in Singapore
How to assess spreads, slippage, and fills
In day-to-day trading, the difference shows up in execution quality, not just market jargon. Market makers and other liquidity providers have a direct effect on the fills retail traders get. So the main thing to watch isn’t only the quoted spread. It’s the actual price and size your order gets filled at.
Timing matters too. On SGX, liquidity is usually strongest between 10:00 AM and 3:00 PM SGT, while the open and close often come with wider spreads. For smaller-cap counters, spreads can run from 1% to 3% or more, which is why limit orders are often a better way to control your execution price.
For systematic traders, this gap between the quoted price and the fill price needs to be built into the strategy from the start.
Why systematic traders need to understand profitable trading strategies and market microstructure
Backtests that leave out spreads and slippage can make returns look better than they are. For systematic traders, market microstructure isn’t just market theory. It affects position sizing, trade timing, and risk control.
A strategy can look good on paper, then fall apart in live trading if execution costs were brushed aside. That’s the part many traders learn the hard way.
Key takeaways
- SGX liquidity is usually strongest between 10:00 AM and 3:00 PM SGT, and spreads can widen around the open, close, and major news.
- Smaller-cap SGX stocks can have spreads of 1% to 3% or more, so limit orders help control execution price.
- Build spread and slippage assumptions into backtests and live execution rules.
FAQs
Why do market makers widen spreads in volatile markets?
Market makers widen spreads in volatile markets to protect themselves when prices start swinging fast and unpredictably.
That wider gap between the bid and ask gives them more room to deal with the risk of getting filled at a bad price. Put simply, when the market gets jumpy, their margin for error shrinks.
In more severe market disruption, some market makers may remove their orders altogether rather than stay exposed to sharp losses.
How can I tell if an SGX counter is too illiquid to trade?
Check the bid-ask spread and order book depth.
The bid-ask spread is the gap between the highest price buyers are willing to pay and the lowest price sellers are willing to accept. When that gap is wide, liquidity is usually low. Smaller-cap stocks may show spreads of S$0.05 or more.
You should also look at order book depth. This shows whether there’s enough volume at the listed price levels to fill your trade without much slippage. If the order book looks thin, even a modest order can move the price more than you’d like.
Should I always use limit orders for smaller-cap SGX stocks?
Yes, in most cases.
Smaller-cap SGX stocks often have limited market depth and wider bid-ask spreads, sometimes reaching S$0.05 or more.
That matters because a market order in a thin market can push your trade through at a worse-than-expected price. In plain terms, you may end up with unfavourable prices and extra slippage.
A limit order gives you more control. It lets you set your entry or exit price, keep transaction costs in check, and cut down price impact when you’re dealing with less liquid stocks.
