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How Market Makers Impact the Crypto Markets

3rd April 2024 Print

Cryptocurrency market makers play a central role in providing the liquidity to crypto markets by actively engaging in the purchase and sale of digital assets. They ensure that buy and sell orders are consistently available, enabling more fluid and efficient trading experiences.

Makers may participate in market-making programs on centralized crypto trading exchanges, like, by placing orders in their order books. Alternatively, they can provide liquidity to decentralized platforms by participating in their liquidity pools.

This article explains the market maker’s strategies and role in forming the market.

Strategies of Market Makers

The most popular strategies include:

- Two-legged trading

- Delta neutral market making

- Grid trading

- Cross-exchange liquidity mirroring

- Market making without hedge

Let’s talk about the two-legged strategy in more detail. Here's how it works:

1. A market maker simultaneously places a lower-priced buy order and a higher-priced sell order relative to the current market price, aiming to capture the spread between these two orders.

2. If the market shifts and one of the orders is filled, the market maker either holds an asset to sell at a profit or looks to repurchase it at a lower cost. Constant adjustments to the remaining open order are necessary to align with market fluctuations and gain profits.

Influence of Market Makers

Here is how market makers impact cryptocurrency prices:

- Liquidity provision. By continuously offering buy and sell orders, market makers reduce the bid-ask spread, helping stabilize asset prices and making it easier for other traders to execute transactions.

- Price setting. Their trading activities help determine the fair market value of crypto assets by reflecting the latest market information and sentiments in their order placements.

- Reducing volatility. Market makers play a key role in lowering price volatility by ensuring there's a steady flow of orders, which can absorb large trades without sharp price changes.

Regulatory Issues

Crypto market makers may face several regulatory issues:

1. Licensing requirements. Depending on the jurisdiction, market makers may need specific licenses to operate legally.

2. Compliance with anti-money laundering (AML) and know-your-customer (KYC) laws. Ensuring transactions adhere to AML and KYC regulations is crucial to prevent illicit activities.

3. Market manipulation concerns. Regulators scrutinize market makers for potential manipulative practices, such as wash trading or layering, to ensure market integrity.

4. Securities regulations. If a crypto asset is classified as a security, market makers must comply with additional securities laws, which can vary across regions.

Market makers play an essential role in the crypto market. Not only do they ensure liquidity and facilitate efficient trading, but they also influence the overall market dynamics through their strategic operations. Despite facing regulatory issues, their contribution is fundamental to the market's health and growth.