What is a Crypto Exchange Market Maker and What is Their Role?

Crypto market making is an essential aspect of the entire cryptocurrency ecosystem. It involves the continuous initiating of buy and sell orders for digital assets on various trading platforms. Market makers play an important role in providing liquidity to the market, facilitating uninterrupted trading operations, and narrowing bid-ask spreads.

Who is a Crypto Exchange Market Maker?

It is usually a financial entity or specialized market-making company, rarely – individual traders, actively participating in the market. Talking about centralized exchanges, many of them have specialized market-making platforms providing profitable conditions for entities that engage in market-making. That may be reduced fees, rebates, and discounts based on a trading volume, flexible APIs, etc.  An example is WhiteBIT market-maker crypto exchange and Binance.

Importance of Cryptocurrency Market Making

Here are the main reasons why exchanges hire market makers:

  • They increase and maintain the liquidity level. By continually providing buy and sell orders, market makers ensure there is always available trading volume for other market participants. A maker’s order stays in an order book as long as there is someone to match (fill) this order. Without market makers, markets would become illiquid.
  • They form prices. By stabilizing bid-ask spreads and narrowing them, market makers reduce the difference between buy and sell order prices, making the market stronger against volatility.
  • They stabilize the market. A crypto exchange market maker ensures that the assets are bought and sold at fair prices. They reduce the impact of large trades and prevent sudden price jumps.

In addition, market makers’ services help increase the attraction of new tokens, grow their trading volume, and draw investors attention. By doing so, market makers facilitate coin listing on exchange, creating a good reputation and dedicated community for new projects.

Crypto Market-Making Strategy

Involved in active trading and injecting large trading amounts into the market, market makers take the risk of losing money in the case the market moves in the opposite direction. To reduce risks, they adhere to strategies:

  • Delta hedging
  • Arbitrage
  • Statistical arbitrage
  • Order book imbalance
  • Market pegging.

Let’s drill down on the pegging crypto market maker strategy. The idea is to maintain a specific price level for a token, pegging it to an index or reference exchange. To achieve this, they constantly adjust their buy and sell prices and hold them within the desired peg.

The effectiveness of this strategy lies in the market maker’s ability to respond swiftly to market dynamics. By consistently adjusting buy and sell prices, they create a market presence that acts as a stabilizing force. This is crucial for investors and traders who seek a level of predictability in the volatile crypto market.

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