What is a Market Maker in Crypto and Why Are They So Important?

Estimated reading time: 2 mins

In the world of cryptocurrencies, having enough liquidity is like having a well-oiled engine – it keeps things running smoothly. Whether the market is up or down, having plenty of liquidity ensures that trades flow seamlessly, making it a cornerstone for crypto exchanges. Central to this liquidity puzzle are market makers, who play a crucial role in shaping how the market works. Market makers are liquidity providers for cryptocurrency exchange. For example, a well-known crypto exchange WhiteBIT has its own crypto market-making program, through which market makers facilitate liquidity for trading on its platform.

What is a Market Maker?

The Role of a Market Maker in Crypto

Traditionally, exchanges always hired market makers to initiate buy/sell orders for digital assets throughout the day. This helps keep the spread of a digital asset within specific limits and ensures quick order execution. In simpler terms, market makers are essential for exchanges to stay competitive and attract more users.

For individual crypto projects, market makers are also valuable. They help make sure there’s enough liquidity for newly-listed tokens. This is crucial because new tokens often struggle to get started without initial liquidity. In many cases, these projects don’t yet have a community to create demand for their tokens. Cryptocurrency market-making services provide liquidity and stabilize prices for new tokens. By keeping bid-ask spreads in check and offering continuous buy and sell orders, market makers contribute to the success of new projects. 

What to Consider When Choosing a Crypto Market-Making Company?

When choosing a crypto market maker, consider the following factors:

  • Software capabilities. Evaluate the technological capabilities of software-based market makers. A system must be robust and efficient for seamless trading.
  • Key performance indicators (KPIs). Focus on KPI-based results, including spread, slippage, and execution speed. Transparent performance metrics are important for assessing the market maker’s effectiveness.
  • Liquidity provision. Assess the market maker’s ability to provide liquidity in various market conditions. See if they can handle different trading volumes on a market-making platform and maintain stable spreads.
  • Risk management. Consider the market maker’s approach to risk management. A solid risk management strategy ensures responsible trading practices.
  • Reputation. Research the market maker’s reputation and track record in the industry. Positive reviews and a history of reliability talk about a potentially trustworthy partner.
  • Compliance. Ensure the market maker complies with relevant regulations. Adherence to legal requirements is critical for a secure and compliant trading experience.

Before approving any liquidity provider or entity into a market maker program, the exchange’s management conducts due diligence on possible applicants. They check their ability to provide enough trading volume, credibility, and compliance. Altogether, it builds efficient cooperation between crypto platforms and market-making companies.

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