When we place orders to buy or sell crypto assets on a trading platform, we don’t even reflect on how those orders are fulfilled and who is there on the other side of transactions. What if there’s no one to buy your coins here and now? Who stands behind demand and supply in the crypto market? The answer to these and many other questions lies in crypto market maker services. In this article, we will discuss:
- Who is a market maker?
- How do market makers trade?
Who Participates in a Market Maker Program?
You have probably noticed, that some large exchanges like Binance offer a crypto market-making program for its users. Sometimes it may be individual traders, but most often, exchanges impose strict rules on a market maker candidate. Possible makers need to prove their capital and compliance. In addition, they must be experienced in trading, understand how the market works, and be skillful in utilizing market-making strategies. Most often, a market maker’s role belongs to a financial entity, institution, investment company, or firm that continuously adds liquidity to an institutional cryptocurrency platform.
The essence of being a market maker is to continuously place buy and sell prices in an order book of a trading exchange and be ready to fulfill orders at those prices at any time. In fact, market makers create a healthy trading environment and make the market attractive for other participants.
Trading Like A Market Maker
Trading crypto like a market maker involves adopting market maker trading strategies that focus on providing liquidity, managing risk, and capturing profits from bid-ask spreads. Those strategies include:
- Cross-exchange liquidity mirroring
- Grid trading
- Market making without hedge
- Two-legged trading
- Delta neutral market making.
To show how market makers act, we will take the two-legged trading strategy as an example. It is one of the most used market maker trading strategies, where a market maker acts as a middleman. The idea is to buy and sell assets simultaneously: a trader places two limit orders on a crypto asset – a bid price should be below the market price and the ask price should be above it. Once both orders are fulfilled, the market maker makes a profit from the difference between buying and selling prices. Utilizing this strategy, the trader should manage the risk of price slippage and volatility. It requires an in-depth understanding of the market dynamics and the ability to predict price swings.
A lot of experience is needed to comprehend market-making strategies and feel the balance in the turbulent crypto market. This is the reason why trading platforms hire professional market makers or specialized companies ready to go the extra mile to provide liquidity and maintain a healthy trading environment.