What is a Market Maker in Crypto and How Do They Work?

Liquidity is at the core of efficient trading on crypto platforms. It determines how fast assets are bought and sold and whether is there a fair price for them. To maintain liquidity, at which trading would be smooth and prices would be stable, crypto exchanges cooperate with market makers. Today, we will discuss the role of market makers in crypto and dispel some common misconceptions about them.

Who is a Crypto Exchange Market Maker?

It is an entity or firm that provides liquidity to the market by continuously placing buy and sell orders for specific assets, contributing to efficient trading. To start working, an entity partners with a crypto exchange and participates in its market maker program.

By placing buy and sell orders, market makers aim to provide liquidity and reduce bid-ask spreads. Their role is to facilitate efficient trading, ensuring that other market participants can execute orders promptly and contribute to overall market stability.

Imagine a crypto market maker named “T” that continuously places buy and sell orders for a specific digital asset on an institutional cryptocurrency exchange. If the bid-ask spread (the difference between the buying and selling prices) is narrow, traders conduct transactions quickly and cost-effectively. T’s ongoing participation helps keep liquidity at a necessary level, making it easier for other users to buy or sell the assets at fair prices.

A popular crypto market-making strategy is arbitrage, where market makers buy an asset cheap on one exchange and sell it for more on another, making profits and helping keep prices similar across platforms.

Common Misconceptions about Market Making in Crypto

There are many misconceptions about crypto market making. Let’s try to dispel some of them:

• “Market making is wash trading”. Indeed, some unfair market participants create fake trading volumes by buying and selling their own trades. This practice brings no positive impact on real trading volume and has nothing to do with real market making. Fair market makers initiate trading orders that are bought by other market participants, creating real organic trading volume. 
• “Market making is all about running a trading bot”. The fact is that each specific trading pair requires a different approach in market making. In addition, every exchange’s order book is also different. So indeed, some large-volume trades are fulfilled with the help of bots, but that’s far not a one-size-fits-all solution.

Well-known crypto platforms such as Binance or WhiteBIT cooperate with market-making companies, including automated market makers, to always stay ahead of competitors and ensure a safe and stable trading environment for their clients.