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In spite of the fact that market makers have been available for quite a while in the world of financial trading (like stocks, forex, or futures) as of late they have popped up in the digital asset space as well providing crypto market making services. Their importance is irrefutable as they are an indispensable piece of the financial ecosystem because market makers provide structure and stability to the trading activity.
What is Market Making?
Market maker’s principle activity is to make a sound and dynamic market for purchasers and sellers by submitting numerous limit requests in an order book of an exchange. Institutions that offer market making resolutions are registered and as a rule has negotiated an exceptional agreement with an exchange. Such an agreement, on one hand, grants them exceptional trading conditions including lower trading fees yet then again, it commits market makers to give a specific quality of liquidity. Quality of liquidity accessible on various exchanges can be estimated by the depth of the order book and the size of the spread.
Market makers are as of now broadly operating on each well-known exchange that cares about its liquidity. Despite the fact that market makers these days trade electronically, on a securities exchange their job is carried out by High-Frequency Trading institutions, which employ the best quantitative fund specialists in the world to make the most robust trading algorithms. As market making is getting more well-known and widespread, the quality it adds to the trading industry turns out to be more obvious.
Market Making on the Crypto Exchange
Considering that the cryptocurrency market is still young, there are very few market making institutions operating there as of now. And because of its decentralization, the quality and trustworthiness of these market making providers can vary greatly.
Growing Market Depth
A Market maker puts in numerous limit requests and hangs tight for a trader, whose market order will be matched with their pending order. All orders of market makers added to the order book increment accessible market depth and improve the assurance that a specific cryptocurrency can be traded quickly without affecting its value too greatly. This is pivotal for larger trades, that can be executed without noteworthy slippage.
Spread in Control
An added role of the market maker is to keep spreads in reasonable ranges Market making ensures that spreads are well-balanced out. The unpredictability of spreads can cause a trading strategy for some traders to go from highly profitable to loss-making.
To summarize, market makers make a stable and well-structured market where a purchaser and seller may not exist to directly interact with each other. So in the realm of a decentralized market, and outside institutions keeping the volume, price, and spread securely stable is by all accounts a good thing.
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