Market makers aim to minimize bid-ask spreads, reduce transaction costs, and foster increased market liquidity. Market makers are often hired by crypto exchanges to participate in their crypto market-making program. In return, they often receive fee rebates and better trading conditions.
Market-making plays a crucial role in cryptocurrency trading. When we engage in trades on a crypto exchange, there is always someone standing ready to facilitate our transactions by providing continuous buy and sell quotes, ensuring liquidity, and contributing to the seamless execution of trades. Who is that? The answer is a market maker. Let’s see who they are and how they work.
Why are Crypto Market Makers Important?
Market makers, whether financial entities or individuals, enhance liquidity in financial markets by consistently standing ready to buy or sell assets. Their role ensures a constant presence of buyers and sellers, helping in price formation, and contributing to the overall efficiency of financial markets. Market makers aim to minimize bid-ask spreads, reduce transaction costs, and foster increased market liquidity for traders.
Market makers are often hired by crypto exchanges to participate in their crypto market-making program. In return, they often receive fee rebates and better trading conditions.
Also, market makers cooperate with young crypto projects that plan to launch their tokens and need to create organic trading volume and build trust among investors. Market makers help new tokens receive approval for listing on reputable exchanges
How Does Market Maker Work and What Are Types?
In the cryptocurrency sector, crypto market makers operate similarly to their counterparts in traditional financial markets. They are consistently prepared to buy and sell cryptocurrencies, offering quotes for the assets they trade. Notably, crypto market makers must operate 24/7 to meet the demands of continuous trading.
Market makers may vary depending on what crypto market-making strategy they use, but overall, all their types have the same goal – to provide liquidity and guarantee effective price discovery. Here are the most common types of market makers:
- Automated market maker (AMM) – operates on decentralized exchanges (DEX) and uses smart contracts to provide liquidity to those platforms. Unlike market makers on centralized exchanges, where trades take place in order books, on DEXs, asset prices are formed through a math algorithm, and not by matching buy and sell prices.
- OTC maker – companies that offer liquidity within the over-the-counter market. In contrast to exchanges, the OTC market operates in a decentralized manner, facilitating direct trading between two parties.
- HFT maker – high-frequency trading where traders use algorithms to conduct trades almost instantly working on an extremely small time scale. Trades are made within seconds. This allows to conduct a large number of trades per day and make a profit from bid-ask spread.
The role of crypto market makers is indispensable to the cryptocurrency trading ecosystem, providing liquidity, minimizing bid-ask spreads, and fostering efficient price formation.