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Cryptocurrency Market Making and Its Role In Institutional Trading


The crypto market is getting mature with the influx of institutional investors into it. Large market players bring their requirements to this relatively new sector, one of which is the importance of sufficient liquidity. Without it, it would be impossible to process large capital transactions. So liquidity stands as a crucial factor affecting investors’ decisions when choosing a crypto exchange. In turn, crypto exchanges aim to hire a crypto market-making company that will provide stable liquidity to its markets, facilitating large-capital trades and retail transactions.

Today, we will answer the questions: what is market making in crypto, and what is its role in institutional trading?

What is a Market Maker Crypto?

A market maker in crypto is a high-frequency trader, a specialized company, a trading firm, or a bank that is actively engaged in crypto trading and partners with a crypto exchange, for example, Binance. In their day-to-day activity, market makers place buy and sell orders for assets at competitive prices. A maker may buy assets at $55 and sell them at $57, where the difference constitutes a market maker’s profit. By doing a large number of such trades, market makers in crypto receive financial benefits. In addition, by partnering with institutional exchanges, they often receive reduced transaction fees.

The Role and Risks of Market Makers

Here is how market makers create attractive markets:

  • They pour substantial capital into the market and are always ready to fulfill other traders' (institutional and retail) orders.
  • They shorten the buy-sell price difference, creating a fair price close to the market level.
  • They reduce transaction costs.
  • They absorb the possible impact of large order execution, maintaining stability in the market.
  • They ensure stable supply and demand for assets.
  • They capitalize on arbitrage opportunities between different exchanges or trading pairs, helping to align prices across markets.
  • They maintain market stability and a predictable trading environment.
  • They facilitate the liquidity of newly listed tokens on the exchange. 

However, price manipulations and sudden price movements can make it challenging for market makers to reduce volatility. So they should always be ready to adjust crypto market maker strategy to new conditions.

Conclusion

Market making in crypto is an essential component of a healthy trading environment and stability. Market makers provide liquidity, reduce trading costs, and foster market stability. Their continuous presence and activities contribute to the overall functionality of the institutional cryptocurrency market.

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