What are market makers?
Market makers are organizations or individuals who provide liquidity to financial markets by offering to purchase and sell assets at predetermined prices. They play an important role in the cryptocurrency ecosystem by lowering price volatility and minimizing bid-ask spreads.
Market makers provide sufficient liquidity to enable efficient order execution, attract new traders, and stabilize token values. Their presence is critical for the smooth operation of cryptocurrency exchanges, especially for new or low-volume coins. Their stabilizing influence is especially valuable in an ecosystem often characterized by volatility.
However, not all market makers operate on equal footing; some employ manipulative strategies, engage in conflicts of interest, or adopt unethical practices that can hinder a project’s success before it even begins to gain traction.
Identifying “white hat players” who prioritize ethical practices and genuinely align their objectives with the success of the digital asset ecosystem is a crucial step for projects and businesses to ensure long-term viability and build trust.
So, how do you choose a market maker?
Did you know? In markets with few participants or infrequent trading, there may not be enough natural buyers and sellers to create a liquid market. Market makers play an important role in this scenario.
Key considerations when choosing a market maker
Finding the right market maker begins with clearly understanding your project’s needs. By thoroughly assessing each candidate’s experience, technological infrastructure, adaptability, coverage and ethical track record, projects can avoid common pitfalls and lay a strong foundation for liquidity and price stability.
For users, a reliable market maker ensures:
- Faster transactions: By preserving high liquidity and enabling customers to execute trades swiftly and effectively without experiencing large price fluctuations, the existence of a market maker minimizes delays.
- Reduced price volatility: Market makers help maintain price stability by ensuring that there are always buy and sell orders available. This enables smoother transactions for users.
- Increased trading confidence: A trusted market maker creates a transparent and efficient market environment. Users are more likely to invest in or trade assets when they can trust the stability and fairness of the trading process.
- Better user experience: By minimizing slippage and optimizing the order book, market makers enable all participants to trade in a predictable and user-friendly manner.
Additional considerations for projects:
- Adapting to market conditions: To preserve liquidity and stability, a strong market maker needs to be flexible enough to react to unforeseen changes in the market and modify its tactics as necessary.
- Openness and transparency: Select market makers who are open and honest about their prices, services and performance metrics. For the project and market maker to work together smoothly and accomplish project goals, there must be clear communication.
That said, effective communication between a project and the market maker is essential for successful cooperation and attaining objectives.
Did you know? Efficient Frontier, a market maker, leverages data-driven strategies and aims for transparent collaboration, offering invaluable insights for Web3 projects and businesses while addressing the complexities of liquidity management and market stability in the digital asset ecosystem.
Why experience and expertise matter in market-making
Gone are the days when simply having a name like Alameda as your market maker could assure retail interest. When evaluating a market maker in the post-FTX collapse era, a solid track record is crucial. A proven ability to adapt to bear markets and succeed in both traditional finance (TradFi) and crypto markets signals resilience in a space characterized by rapid changes and cyclical market conditions.
A reputation built on performance outweighs superficial branding. For example, rather than picking a high-profile name for the sake of optics, projects should seek tangible evidence of measurable results, such as maintaining tight spreads and robust order book depth near the mid-price, even in volatile conditions.
Instead of becoming a boring part of corporate presentations, key performance indicators (KPIs) must be consistently met over time, demonstrating adequate liquidity, uptime commitments and weekly improvements in trading conditions.
Additionally, a well-structured deal aligned with the project’s needs is a telltale sign of genuine expertise. Ideal market makers will tailor their offerings to reinforce the project’s liquidity and growth goals while maintaining transparent, data-backed performance metrics.
Did you know? Crypto assets function within a complex ecosystem, including exchanges, market makers, digital wallet providers, registrars, smart contract verification services and various consultants. Together, these entities manage critical activities such as issuance and trading to settlement, custody and ongoing support.
Leveraging advanced technology: Key trait of high-performing market makers
In addition to a strong track record, leveraging state-of-the-art technology is a defining trait of top-performing market makers. Those offering custom algorithms, high-performing infrastructure and scalable solutions help maintain stable markets.
Top-tier market makers often develop proprietary trading platforms and infrastructure, giving them a significant competitive advantage. These platforms may include high-performance computing clusters, exchange proximity colocation and specialized hardware and software for executing trades.
Some firms use high-frequency trading (HFT) algorithms that spot tiny price differences between exchanges and act in milliseconds. Others rely on statistical arbitrage models, which use math-based strategies to find mispriced assets, while market-making algorithms continuously adjust bids and ask to keep trades running efficiently.
Machine learning models (a form of artificial intelligence) can also help by analyzing vast amounts of data to find hidden patterns.
Web3 projects and businesses should take a closer look at the following metrics to evaluate a market maker’s capability:
- Latency: Reaction speed to market changes.
- Execution speed: Order fulfillment rate.
- Slippage: Proximity of final trade price to the expected price.
- Order fill rate: Completion percentage of order requests.
- Bid-ask spread and market depth: Precision of bid-ask spreads and liquidity levels at various price points.
Such metrics reveal how adeptly a market maker can handle sudden market shifts, adapt to shifting conditions, and help a project thrive in a dynamic market.
The need for customization in market maker services
No two blockchain projects are identical. With variations in tokenomics, funding needs and investor dynamics, a one-size-fits-all strategy often fails to provide optimal liquidity.
Instead, market makers must customize their services to fit each project’s unique needs. This might include adjusting the required inventory for market making, tweaking bots on centralized exchanges or setting up decentralized exchange (DEX) liquidity pools.
Flexibility is demonstrated by a market maker’s willingness to deeply understand a project’s roadmap, challenges and goals before recommending a solution. Transparency in explaining why a strategy is appropriate and sharing valuable contacts — like exchanges or relevant partners — also reflects their genuine commitment to the project’s success.
Given the fast-paced nature of the market, a market maker’s adaptability is crucial. Projects should evaluate a market maker’s history of responding to unexpected events to gauge their reliability in dynamic conditions.
Global reach: An essential quality of market makers
Building a robust community and ensuring token liquidity requires a market maker with a global presence and the ability to navigate regional regulations.
Market makers, including Galaxy Digital and Efficient Frontier work closely with centralized exchanges (CEXs) such as Binance and OKX while navigating the complexities of local compliance requirements. However, some market makers may be restricted by regional regulations, limiting their coverage in key markets such as the United States or South Korea.
When it comes to on-chain liquidity, market makers often offer support to projects on a case-by-case basis. For many decentralized projects, automated market maker (AMM) solutions available on DEXs may be sufficient, eliminating the need for additional external assistance. However, aligning a market maker’s services with your listing strategy is essential for optimizing resource allocation and ensuring a seamless market launch.
The choice of whichat market makers to partner with ultimately depends on the project’s listing goals and market needs. A well-defined listing strategy will guide the selection process, ensuring that the chosen market makers can effectively support the project’s liquidity needs while enhancing its market presence.
Did you know? An AMM is a type of DEX that relies on a mathematical formula to determine the price of assets. This formula can differ between AMM protocols. AMMs enable users to trade assets and contribute liquidity to the trading pool, earning rewards in the process.
The importance of ethics and transparency in market makers
Blockchain technology is built on transparency and accountability — two principles that should encourage ethical practices. Unfortunately, today’s digital asset space is still vulnerable to malicious actors who exploit the system for personal gain.
Despite its risks and legal ramifications, wash trading is still prevalent among unethical market makers. Such tactics can damage a project’s reputation and attract regulatory scrutiny, potentially leading to disastrous consequences, like ending up as Sam-Bankman Fried’s cellmate.
To identify trustworthy partners, look for evidence of ethical practices, such as reputable audits or clear reports. Market makers who provide honest performance data and maintain open communication are more likely to build healthy, lasting markets and loyal communities.
By choosing the right market maker, Web3 projects can ensure that their users receive a smooth and secure experience, which fosters trust and long-term participation in the ecosystem.