Market maker
Written by Eric Choy
Introduction
In the traditional sense, market makers are crucial to the quality of trading exchanges for financial instruments. Essentially they consist of small or large institutions that place open limit orders of different bid/ask prices on exchanges to provide liquidity to market takers. This allows market takers to trade easily for reasonable prices by reducing bid-ask spreads. It also increases market depth and gives traders the assurance that the price they want to buy won’t incur dramatic slippage. Nowadays, market making firms use electronic trading algorithms to keep their services competitive. If an exchange has constant tight bid-ask spreads, then one can be assured that their market makers are institutional grade.
Within the crypto markets, there are currently many firms that provide market making services. Considering that the market right now is very decentralized with many different exchanges, the playing field is vast and open. This has also led to many exchanges having price discrepancies amongst different cryptocurrencies.
In general, market makers pay less in trading fees due to the services they provide. Although some have been accused of wash trading and fake volumes on crypto exchanges, overall they are necessary to maintain price stability and efficiency in the crypto trading markets.
Suggested Reading
A Guide to Market Making for Crypto Startups by Jakob Palmstierna
Battle of the Bots: How Market Makers Fight It Out on Crypto Exchanges by Mack Grenfell
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