Market maker: who are they and what role do they play in the crypto market?
In the world of cryptocurrencies, market makers play an important role in providing liquidity and stability in trading. Despite their significance, the activities of market makers raise many questions related to price regulation, the legality of their actions, and their impact on the market. Let's analyze the key aspects of their activities.
1. Who are market makers in the crypto market?
A market maker is a market participant whose role is to ensure liquidity and stability in trading assets. In the crypto market, market makers can include:
• Specialized companies.
• Major exchanges.
• Algorithmic traders.
Their main function is to maintain a constant presence of buy and sell orders in the order book. This allows traders to execute trades almost at any time, avoiding situations where there is 'no counterparty' for a transaction.
Example: if you want to sell a certain volume of cryptocurrency, and there are no suitable buy orders in the market, a market maker can take on that deal, minimizing the risk of delays and price fluctuations.
2. How can they regulate the value of assets in the market?
Market makers have a significant influence on price formation through several mechanisms:
• Liquidity control: By placing large orders, they can create artificial levels of support or resistance. For example, when the price approaches a key level, a market maker may increase order volumes, hindering further movement.
• Algorithmic trading: By using high-frequency algorithms, market makers can quickly respond to market events, adjusting prices and eliminating arbitrage opportunities.
• Arbitrage between exchanges: Market makers can balance prices between different trading platforms, smoothing out significant discrepancies in asset values.
However, these actions can be twofold: on one hand, they stabilize the market, on the other — create conditions for manipulation.
3. Is this legal? How are manipulations regulated in the market?
The legality of market makers' actions depends on their methods of operation and the legislation of a specific country. In traditional financial markets, such as stock or commodity exchanges, market makers are strictly regulated. Key aspects of regulation include:
• Prohibition of manipulation: For example, practices like pump-and-dump (artificially inflating prices) or spoofing (placing false orders) are punishable by hefty fines.
• Transparency: Companies are required to disclose their methods and comply with established regulations.
In the cryptocurrency sphere, regulation of market makers is less strict, opening up opportunities for manipulation. Many countries, including the USA (through the SEC) and the European Union (through MiCA), are implementing measures to strengthen control over the crypto market. However, on unregulated platforms, abuses remain a common problem.
4. Is it worth conducting technical analysis of crypto assets considering the manipulativeness of market makers?
Technical analysis remains one of the key tools for traders even in the volatile crypto market. However, its effectiveness depends on the ability to account for the influence of market makers.
• Signal distortion: Actions of market makers, such as creating false levels or sudden spikes in volume, can lead to false signals in indicators.
• Increased significance of volumes: Analyzing trading volumes becomes critically important. Unusual spikes in activity near key levels often indicate intervention by large players.
• Long-term trends: Over larger time frames, the actions of market makers have less influence, making technical analysis more reliable.
Thus, conducting technical analysis is worth it, but taking into account that short-term movements may be subject to manipulation.
Conclusion
Market makers play a crucial role in the crypto market, providing liquidity and reducing volatility. However, their actions can both stabilize the market and lead to manipulation. Understanding their operations allows traders to adapt their strategies, taking possible interference in market processes into account. Technical analysis remains a useful tool, but it requires a critical approach and attention to trading volumes.