June 23rd 2020
Market makers have become a significant driving force in the cryptocurrency market. Primarily, their activity is to create an active, progressive market for buyers and sellers by placing multiple limit orders in an exchange platform’s order book.
These services are usually provided by institutions that are registered by and have an agreement with the exchange in question. On one hand, such an agreement allows them to access some special trading conditions – including lower fees and others. On the other hand, however, it also obligates them to provide a specific level of liquidity in the market.
This is a significant reason why the quality of liquidity that traders can find on exchanges can be measured by the depth of the exchange’s order book and the size of the spread.
In the crypto space, the market makers quote buy and sell process for various assets on an exchange. By doing so, they help to improve price discovery and provide an avenue for effective trading between themselves as well as for other traders. At the end of the day, the work they do helps ensure that market operations can move at a healthy pace.
There are two significant benefits that the activities of market makers provide. The first is that they make liquid trading possible. This way, buyers and sellers can transact at reasonable prices in a quick, seamless manner. They do this by maintaining healthy order books with tight buy/sell spreads. At the end of the day, they can minimize volatility in the market and stabilize the price of the underlying asset.
The combination: IT, quantitative finance and crypto market understanding
In the traditional space, market makers have been operating widely across every popular exchange platform – the New York Stock Exchange, the NASDAQ, etc. While they mostly trade electronically nowadays, their roles in a mature stock market are usually fulfilled by high-frequency trading institutions.
These institutions hire quantitative finance experts to develop trading algorithms. As the crypto market continues to grow in prominence and popularity, the influence of these market makers becomes more visible.
Like it is in the traditional space, market makers in the crypto industry also have to do a lot of quantitative finance. This is one of the most important factors, as it helps in making calculations and setting the right buy/sell prices to ensure optimal transaction levels.
At the same time, it is important for a market maker to understand how the crypto market works. An understanding of the prevalent market conditions will help to improve market maker’s ability to spot prices, and it should give a sense of when calculations are right or wrong.
As for IT, the rationale is pretty simple; IT is everywhere now, and for an industry that is as progressive and revolutionary as the crypto space, technology is playing a significant role
How to find a good market maker
“To operate effectively we don’t only need to understand trading and crypto, we have to become close partner of the project: understanding the business, current situation and plans is crucial.” Nikita Martynyk, CLS Business development manager
Ideally, a market maker should have the following qualities:
Price improvement: When you hire a market maker, you expect to receive market liquidity and improved trading conditions. This will invariably improve the price of the asset
Depth of liquidity: Creating and improving liquidity is one of the most significant reasons why companies and crypto projects hire market makers.
Service offering whatever the financial climate: The market never sleeps. Even in a market downturn, an effective market maker should be able to provide their service and ensure that your asset’s liquidity is upheld
Flexibility: Offering market-making services for more than one asset is always an added benefit.
Immediacy of dealing: Services should be provided in real time, and in most cases, you should be able to see results quickly. Every moment waster is a potential trader or investor lost.
Bespoke technology solutions: Technology is a tool that market makers use to optimize their operations. It helps for one to have the right technology to apply in quick time, depending on the market factors.
How does it affect crypto projects?
Considering the fact that the crypto market is still young – especially compared to the traditional financial market, there aren’t many market makers operating. At the same time, the fact that cryptocurrencies operate on the principle of decentralization means that their prices can differ across various exchanges.
“Our aim is to assists the market regardless if there is upturn or sharp fall – traders should always have the possibility to perform trades at optimal market price. When traders understand it, they become much more loyal to the project, they are not afraid to invest.”
– Adam Levin, CLS Head of Trading
Most of the small exchanges that don’t use market makers are prone to experiencing market discrepancies. Consequently, the absence of these makers means that asset prices will differ from their market price. These differences could mean that traders will sell their Bitcoins cheaper or buy them at higher prices than they would on larger exchanges.
The importance of market makers to crypto projects
Digital assets are at their most vulnerable when they first get issued and listed on an exchange. The company behind such a token will need market makers because they have to encourage traders and investors to transact using their tokens.
For assets to be listed on exchanges, they need liquidity. Market makers provide an opportunity for that to happen. Nothing drives traders and investors away like high volatility and illiquid markets. If a company behind a crypto project is hoping to spur confidence in its asset, then a market maker becomes an invaluable piece of the puzzle.
– Nikita Martynyk, CLS Business development manager
At the end of the day, the objective is to create a market that investors and traders are comfortable to play in. the chances of getting that done without a market maker are quite low.