What is market making: a short guide?

What is market making: a short guide?

Published: 19-03-2024
                                    
Agencies |.- In trading, be it traditional stock or crypto markets, where asset prices keep changing a lot, it's crucial to maintain at least some stability. That means finding a balance between people wanting to buy and sell. When more people want to buy than sell, prices can surge a lot, and vice versa. To prevent sharp price swings and maintain a balance between buyers and sellers, crypto exchanges partner with a crypto market-making company. They help keep the prices of financial assets stable by doing certain activities. In this article, we will answer the questions, who can be a market maker, and how do market makers work?

Who can be a market maker?

Market makers are usually financial companies or banks that take active participation in the crypto market, particularly one specific asset. That also may be high-frequency traders that influx large trading volumes into the market and have no interest in publicity. Usually, these are companies with large capital and expertise in financial markets, capable of managing risks and using advanced tools.


Important to note that GSR was one of the first market makers that played a crucial role in providing liquidity to early crypto exchanges in 2010.

What do market makers do?

Crypto market makers play an essential role in financial markets, facilitating trading and contributing to price stability. Here's what they do:

1. Continuously offer buy and sell orders for various cryptocurrencies, ensuring there are always prices available for traders to execute trades.

2. Quote bid (buy) and ask (sell) prices. The difference between these prices is known as the bid-ask spread, which constitutes market makers’ profit.

3. By providing liquidity, market makers reduce price volatility, making it easier for traders to buy or sell assets without significant price slippage.

4. Manage their own risk by adjusting their trading positions. They balance their portfolios and minimize potential losses due to market fluctuations.

The primary source of income for market makers comes from the bid-ask spread. They buy at the lower bid price and sell at the higher ask price, pocketing the difference as profit.

Market makers often have agreements with exchanges or trading platforms that provide rebates or incentives based on the volume of trades they facilitate. Higher trading volumes can result in increased earnings.

| Agencies

Tags |

#Cryptocurrency #Market #Cryptos #Making #Exchanges #Money