Liquidity is an essential component of a successful crypto market. It promotes price stability, facilitates trade execution, attracts institutional investors from financial markets, instills market confidence, aids in price discovery, and reduces trading costs. A liquid token is a token that has enough buyers and is easily sold without causing price jumps.
How do we maintain liquidity in the crypto market? Trading exchanges and platforms usually cooperate with special entities called market makers. Who are they and their role in building a comfortable trading environment in this volatile market? Let’s find it out.
Large institutional crypto trading platforms offer a variety of opportunities for institutional investors, who can serve as market makers by pouring large amounts of funds into the market and thus providing liquidity. A crypto market making program includes some rebates and lower fees for those institutions, allowing them to earn from their activity.
Besides institutions and companies, market-making function can be performed by:
- Individuals or entities that enhance liquidity on a crypto exchange by buying and selling assets, all the while earning profits from the bid-ask spread differential.
- Banks, institutional traders, and brokers can also perform market-making functions.
- Bots may also act as market makers – they ensure automation of buying and selling, configure strategies through customizable algorithms, etc.
As the crypto markets are subject to price volatility, maintaining liquidity at a sufficient level is a hard job. If there is no liquidity for a crypto pair, its trading becomes almost impossible, which also increases fees and the duration of the order execution. The higher liquidity a crypto exchange offers, the higher its trading volumes and trust level to it.
How do market makers function? They start by submitting the highest and the lowest prices for a digital asset. The difference between the highest price (proposition) and the lowest price (agreed by the seller) is called “‘spread”. Market makers work on recusing the spread, in highly liquid markets.
With the absence of market makers, markets become less active, and thus, less attractive. Those market actors take active participation in placing orders in order books to maintain liquidity, cut spreads, and make a profit.
Market makers use specialized software for algorithmic trading, automating market-making bots to run on a crypto exchange.
Market-makers are entities or individuals hired by trading platforms to place bid-ask asset prices, ensuring spreads remain within set limits, maintaining order depth, and keeping orders active for a minimum duration. Essentially, market makers contribute to the crypto exchange’s competitiveness and its ability to draw in traders.