The term “market maker” is not new to the financial sector. Market makers are essential participants in any market as they maintain a demand-supply balance and pour liquidity. In this article, we will discuss, what does a market maker do and why are these market participants so important for the crypto sector?
How Does Market-Making Work?
A market maker is an individual or a company, capable of injecting significant trading volumes into the market, thus, supporting liquidity at the required level. Day by day, they place buy and sell orders for specific crypto assets, providing both supply and demand for the market. Due to market makers, other traders and investors can conduct trades easily and efficiently, with no delays.
By placing buy and sell prices, a market maker aims to cut the difference between them, which is called “spread”. This difference constitutes a maker’s profit.
How Do Market Makers Make Money?
Professional market makers use advanced tools and software in trading. They are capable of performing a large amount of trades per day, collecting bid-ask spread to their profit. Market makers are usually charged much lower fees, as they contribute to the liquidity of a market maker crypto exchange.
An essential role of market makers lies in providing liquidity and reducing volatility:
● Market makers ensure that the volume of trades is large enough for other traders to execute trades easily and without delay. Without market makers, there would be insufficient liquidity, and other traders would face difficulties in selling or buying tokens.
● By placing buy and sell orders, market makers absorb changes in demand and supply, not allowing them to move prices sharply. For example, let’s say there is a sudden growth in demand for an asset. This demand could lead to a significant price surge, as there would not be sufficient supply to meet this demand. However, due to market makers, this extra demand gets absorbed through selling assets to those willing to buy.
How to Become a Market Maker?
Crypto exchanges are interested in hiring market-making companies that possess licenses and comply with regulations in this field. These may be trading firms, banks, institutional investors, and high-frequency trades. Becoming a market maker requires an application to a crypto exchange and providing licenses allowing for this activity. In addition, many platforms impose a trading volume threshold a company needs to provide to become a market maker.
Conclusion
Market makers’ role in the crypto market can’t and should not be underestimated. Without their services, there would be a huge imbalance between supply and demand, much higher volatility, and delays in order fulfillment.
