Market-making refers to active participation in the trading process through continuous placing buy and sell orders for particular assets, which means “making the market”. Crypto exchanges, especially those for institutional investors, demand robust liquidity to conduct large-volume trades efficiently and at a fair price. For that purpose, they partner with market makers, that pass due diligence, register on a market maker platform, and start actively placing orders. Market maker’s actions grow the liquidity and attractiveness of crypto platforms, creating a stable environment for other traders and investors.
Goals of Market Making in Crypto
Here are the main goals for a market maker operating in an order-book exchange:
- Tight spreads. A market maker for crypto aims to quote competitive bid and ask orders with a narrow spread. Spreads are typically higher for less liquid assets, making professional market makers crucial for managing illiquid tokens. Quoting prices across multiple levels and maintaining order book depth enhances trade execution by minimizing slippage and price impact.
- Risk management. Funds allocated for liquidity are affected by volatility and changing supply-demand balance. Risk management practices should extend beyond company decision-making to the strategies themselves. These measures protect capital from malicious activities like pump and dumps, allowing market makers to capitalize on arbitrage opportunities ahead of external participants. This ensures synchronization of prices across various exchanges and trading pairs.
- Trading volume. High trading volumes draw investors’ interest and may lead to asset price growth, which is undoubtedly valued by crypto exchanges. However, it’s important to note that creating artificial volume (wash trading) is not allowed and doesn’t contribute to a liquid market. A market maker’s role is to provide genuine liquidity, fostering organic trading growth over time.
Market-Making Strategies
Depending on a market maker’s goal, one chooses a crypto market-making strategy:
- Cross-exchange liquidity mirroring
- Grid trading
- Delta neutral market making
- Market making without hedge.
Market making without hedge is one of the most popular yes risky strategies. It implies that a market maker buys a crypto asset and holds onto it to sell it later when its price grows, instead of using hedging tools to offset possible losses. The main requirement for success in this strategy is a trader’s ability to forecast price growth accurately. This strategy requires an in-depth understanding of the crypto market and risk tolerance, making it an approach for experienced traders.
Conclusion
Market makers form attractive trading environments for crypto platforms through their active participation in the trading process. Depending on what goals they set, market makers choose a strategy. That may be hedging risks, exchange mirroring, or holding onto an asset long-term to receive a profit from its future value growth.
