Functions of Market Makers
Market makers perform several essential functions in the cryptocurrency market, including:
Providing Liquidity: They ensure there is enough liquidity between buyers and sellers to maintain active market participation.
Providing Quotes: They offer bid and ask prices at any given time, facilitating trades between market participants.
Risk Management: Market makers manage trading risks and maintain a balanced risk-return ratio to protect their interests and those of their clients.
Providing Advice: They supply market information and analysis to assist clients in making informed trading decisions.
Improving Market Efficiency: By reducing the spread between buyers and sellers, market makers enhance overall market efficiency. Market makers in the crypto industry operate similarly to traditional market makers. They provide market liquidity, execute buy and sell orders instantly, and earn profits from the spreads between these orders. However, due to the relatively unregulated nature of the cryptocurrency market, there is no stringent code of conduct for market makers, and the technical demands for ensuring transaction security are higher.
Market makers follow a simple principle: "buy low, sell high." This approach requires handling large volumes of transactions, sometimes up to tens of thousands per second. They use advanced algorithmic programs to monitor numerous parameters and recalculate forecast prices multiple times per second, thus providing market liquidity without incurring losses. Despite this, even sophisticated trading algorithms can falter due to rapid trade speeds or incorrect price predictions. During periods of high volatility, market makers might incur losses while trying to stabilize the market.
Therefore, a stable or slightly fluctuating market is ideal for them, while days with significant price movements can lead to substantial losses. In essence, while regular market participants react to past events, market makers anticipate future market movements to set optimal buy and sell prices and determine order volumes.
Cryptocurrency exchanges and market makers often collaborate closely. Some exchanges maintain their own market-making teams, while others partner with third-party market makers. This cooperation can take two forms:
Direct Cooperation with Crypto Exchanges: Exchanges offer special programs for market makers, providing personalized trading terminals. Through APIs, exchanges share order book information and market depth with market makers, facilitating pricing and matchmaking.
Indirect Cooperation with Crypto Exchanges: Market makers provide over-the-counter (OTC) market-making services through intermediaries or platforms. Market makers are crucial but not mandatory for liquidity provision on crypto exchanges. They must negotiate terms such as commission distribution and trading volumes with exchanges to ensure profitable and smooth cooperation. Additionally, they must adhere to exchange rules and external regulations to ensure legal compliance. From a trading mechanism perspective, market makers with internal exchange connections play a significant role in price determination, which can help prevent price manipulation to some extent. Their presence enhances exchange liquidity, improving user experience and loyalty, and making the exchange more profitable. Consequently, exchanges often offer discounts to market makers for their activities. $ETH $NOT $CRV
