Liquidity is a crucial aspect of the cryptocurrency market, allowing assets to be easily bought and sold. It mainly refers to a platform for institutional crypto trading where investors operate large amounts and need the trades to be fulfilled immediately. Such platforms cooperate with market makers to grow liquidity and ensure a stable trading environment. Who are they? How do market makers work, and what strategies do they use? Look for the answers in this article.
Who is a Market Maker?
A market maker is a specialized entity, a financial company, or a high-frequency trader that partners with a crypto exchange and uses its market-making platform to add liquidity to it. An example may be the WhiteBIT market maker crypto exchange. Operating on this platform, makers receive the following benefits:
- low fees;
- rebates;
- advanced tools;
- APIs;
- support.
The most common market-making strategy in crypto implies continuously placing buy and sell (bid and ask) orders for crypto assets, acting as middlemen between crypto buyers and sellers. These orders are placed frequently, allowing makers to reduce price volatility for the traded assets. Maker’s profit comes from spread – the difference between the buy and sell price. Even though the goal is to shorten the spread as much as possible, makers perform a high volume of trading and thus increase their profits. Thick order books allow for the execution of large orders and maintain a fair price.
How Does Market Making Work?
Here are the common market-making strategies:
- Delta neutral market making
- High frequency market making
- Grid trading
- Cross-exchange liquidity mirroring
- Market making without hedge
- Two-legged trading.
Let’s discuss how the crypto market-making strategy without hedge works. It may be a highly profitable approach in trading, provided that it is executed correctly. The essence is that the market maker takes on the risk of holding onto an asset without using any hedging strategies to offset losses. They buy assets low and then sell them at a higher price. The idea is based on the maker’s trust in the asset’s price growth. However, this belief is not groundless – the maker should know the market profoundly and predict its movements.
To wrap up, market-making is vital for ensuring liquidity and a stable trading environment on crypto exchanges. They cooperate on a “win-win” principle: exchanges receive sufficient liquidity and attractive markets, while market makers receive low or even zero fees and advanced tools for trading.
