Liquidity is a foundation for trading, be it traditional markets or crypto. Where does liquidity come from, and who stands behind it? That’s what we’re going to discuss in this article.
Who Are Market Makers?
Market making in crypto is the process of adding liquidity to a market or a specific trading pair. The process of pouring liquidity implies that a market maker submits buy and sell orders on a specific crypto pair with the difference in prices. The profit they get accounts for the difference in the bid and ask price.
Who can be a market maker? Building markets is quite a challenging task, especially given the highly volatile markets and possible speculations. So that must be an individual or entity with an impressive background in trading and sufficient funds. This role can be taken by professional traders, but most often, market-making is performed by institutions such as banks, brokers, trading firms, etc. These are entities with large investment potential. Centralized exchanges like Binance, Coinbase, and others make partnerships with such entities to make sure they have sufficient liquidity for trades on their platforms.
While market makers are entities or individuals, pouring liquidity into crypto markets, automated market makers are DEX protocols that use math formulas to price assets. They don’t use order books and don’t place bid and ask prices. Instead, they follow a particular pricing algorithm.
What do Market Makers Do?
Market makers perform these tasks:
- Place buy and sell orders at different price levels to create a continuous supply of liquidity in the market. This allows other traders to enter or exit positions easily.
- Make sure spreads (the difference between bid and ask prices) don’t cross the max level, making it cost-effective for traders to execute their orders without incurring significant trading costs.
- Help stabilize crypto prices – prevent rapid and excessive price fluctuations that can deter traders and investors.
- Use crypto market-making software to automate the processes of buying and selling digital assets. A crypto market-making bot is a software program designed to automatically create and manage buy and sell orders on a crypto exchange to provide liquidity to the market.
To build crypto liquid markets, market makers use specific strategies: delta neutral market making, high-frequency “at the touch” market making, and grid market-making strategy.
Without liquidity, a trading platform is just a useless piece of software. Market makers are the backbone of efficient crypto trading. They help develop markets for new crypto assets and give new trading platforms the chance to gain users and grow. Market making job is not for everyone because it requires experience in trading, understanding the market, and relevant resources.