What Do Market Makers Do to Create a Favourable Trading Environment?

When placing an order to buy or sell crypto on a trading platform, we don’t reflect on who’s there on the other side fulfilling our orders. What happens if there is actually no organic counterparty to buy or sell assets here and now? That is called a non-liquid market, where trades are processed slowly and buy and sell price differences are huge. In such markets, you may wait for a counterparty to buy your tokens for hours or even days. And this has nothing to do with efficient trading. Therefore, liquidity stands as the lifeblood of effective and competitive markets. The question is, where does liquidity come from? In this article, we will discuss cryptocurrency market making and its role in building a healthy trading environment.

Market Makers in Crypto – Who Are They?

A market maker is an organization, specialized company, institutional investor, high-frequency trader, bank, brokerage house, etc. that stands behind liquidity provision to crypto markets. Due to market makers, traders, and investors can buy and sell digital assets in any amount and whenever they want for granted.

While participating in a crypto market-making program, a maker is tasked to continuously place buy and sell orders on assets, always ready to fulfill other traders’ orders. Market makers aim to decrease the difference between buying and selling prices (spread), placing bid (buy) and ask (sell) orders close to the market price. Thus, they contribute to fair pricing on crypto platforms.

Why are Cryptocurrency Market Makers so Important?

Here are the benefits of market-making in crypto:

  • Supporting liquidity. As we said at the beginning of this article, non-liquid markets are inefficient markets. Market markets create liquid markets where traders easily buy and sell assets.
  • Shortening spreads. Low-liquidity markets are characterized by big spreads, making it hard for traders to buy and sell tokens. High-liquidity markets offer low buy-sell price differences, reducing transaction fees and attracting more traders.
  • Volatility control. Although it is impossible to have total control over crypto volatility, market makers do their best to avoid sharp price jumps in the markets in which they work. By placing buy and sell orders, they absorb price movements in demand and supply, smoothing out fluctuations.

Wrap Up

Market making in cryptocurrency plays an essential role in maintaining liquidity at a level at which traders and investors can easily buy and sell assets. Market makers always stand ready to buy and sell digital assets, maintain fair pricing, reduce transaction costs, and to some extent, control volatility.