The Crypto market, like any other market, can only function when there’s supply and demand. This requirement gets more serious for bigger exchanges that need even larger liquidity to function.
Market makers are the people who “make” the market responsibly, providing this said supply and demand, while keeping the price fair at the same time.
Hence, it’s common to see exchanges partnering with a market maker platform to create said liquidity and cash flow for their users.
The primary goals of market makers
Here are the primary goals of those who make the market:
- Tight spreads: “Spread” is the difference between the highest price to buy and the lowest price to sell quoted by the maker. Makers try to narrow this spread down as low as possible even though it’s less profitable to them as it attracts traders.
- Reducing volatility: The crypto market is certainly extremely volatile. Market makers help tame this volatility with proper risk management practices. When the price starts to surge extremely fast, the sell orders create a resistance. Similarly, when it starts to dip, the sell orders create a resistance.
Best strategies used by market makers
Market-making is a risky and technical task. Hence, it has some pretty serious technicalities attached to it.
Here are some of the most common strategies used by market makers to keep the market stable and turn a profit for themselves:
- Spread management: Of course, the makers decide the difference between the bid and ask prices.
- Algorithmic trading: Many makers use automated algorithms to keep up with the market as fast as a computer can. These algorithms automatically set the bid/ask prices depending on the spread that it’s been asked to maintain.
- Grid trading: This is extremely helpful with a market that’s moving sideways. Market makers use this to set bid and ask orders at regular intervals, hence, profiting from the dips and surges frequently.
- Delta neutral market making: This is an advanced technique used by those who generally trade options!
Final words-Crypto Market Making: Goals and Strategies
That’s it folks. While this wasn’t an advanced guide, I hope it did give you enough pointers to start understand who market makers are, why they’re important and why we need them.
Of course, their true goals or importance spreads (no pun intended) far beyond what I’ve discussed. In simpler words, without market makers, there could be much more price manipulation, volatility, lack of liquidity and a lot of other things that we do not want in the crypto space.
