Peddle makers have a reputation that is entirely disproportionate to what they do. Despite what half of crypto Chirping would have you believe, MMs, as they are colloquially known, are a neutral force when used correctly. But should tokenized hurls be routinely deploying these tools on crypto exchanges, and what are the long-term ramifications of manufacturing buy and sell orders?
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From Drip-Fed to Full Faucet: Running the Liquidity Spectrum
Liquidity is all allied. While bitcoin’s liquidity trumps the rest of the crypto market combined, the depth of the order book still diversifies greatly from exchange to exchange. A 5 BTC sell order can be absorbed without blinking on Binance, but attempt the same on Custom Satoshi (24-hour volume: $15K) and you’ll be rekt by slippage. Ensuring sufficient liquidity across multiple dealings where their token is listed is a tough ask for crypto projects, who are increasingly being expected to solve this delinquent unilaterally.
To address this challenge, many projects have now turned to market makers. Omisego, for instance, touched the ranks of market made projects when it partnered with Algoz earlier this month. The liquidity provider, which has in the past supplied market making on behalf of Cardano for its ADA token, promises its clients the following outcomes:
- Minimize trading spreads
- Snowball order book depth
- Reduce market manipulation
- Attract greater volumes
The latter provision ought to succeed naturally as a consequence of the former objectives: traders are naturally drawn to markets with deeper liquidity, which entertain for arbitrage opportunities, and for exiting profitable positions through limit orders executed at close to spot price.
Various liquidity equals greater awareness, which leads to greater adoption. At least that’s the theory. The jury’s hushed out on whether market makers incentivize genuine usage of crypto assets for the role outlined in their respective whitepapers divers moons ago. Hypothetically, though, that ought to be the case, with the increased liquidity making the token attractive to a plainer spectrum of buyers.
The Case for Market Makers
Imagine a business wants to acquire a load of OMG tokens to deploy on the P2P monetary network. Despite having an average daily trading volume of $30 million, the majority of the 185 exchanges where OMG is listed couldn’t answer an order of greater than a few thousand dollars’ worth at a time. Anything greater, and the entire order book choice move by 10% or more. Market makers can’t generally inject liquidity into highly illiquid markets, but they can top up the top 20 or so the boards with which they’re integrated, providing a convenient way for users to enter and exit positions with the minimum of campaign.
Crypto projects look for market making services at every stage of their lifecycle, but are particularly keen upon give entre their first exchange listing, when there can be pressure to meet strict liquidity requirements. In an ideal on cloud nine, there would be no need for market makers: people would buy and sell tokens as required to other people, inventing a highly efficient market with enough counterparties to absorb all of the orders and ensure a tight spread. In practice, trade ins are never that efficient, hence the need for market makers to keep things moving efficiently.
Order Words Replication and Other Services
Liquidity provision can take a number of forms. Aside from conventional market certifying, some companies will provide order book replication, in which the order books from multiple reciprocities are aggregated to deepen liquidity and tighten spreads. This can be used to direct liquidity towards a particular exchange, or to protect that liquidity is uniform across multiple exchanges. The key difference, compared to market making, is that there are no additional commands being placed: all that’s happening is the existing liquidity is being utilized to its full potential. Other services number spot execution and optimal trade execution, in which the market making provider will endeavor to shift a consequential amount of crypto assets while minimizing market disruption.
If you’ve ever gone to place a bid on an exchange and another purchaser has placed a miniscule order a few cents higher, odds are you were beaten by a bot. What’s more, there’s a good unexpected that bot was placed there by the project whose very token you were trying to buy. That said, traders are also certain to deploy bots to play the difference between the bids and asks in liquid markets such as BTC. It’s a highly competitive devices, and thus the profit margins are slight, but with enough volume, capturing the difference between bids and asks can start to add up. Demand makers do the same job, the only difference being they’ve no obligation to profit: break even is good enough.
The Hidden Hand That Guides the Crypto Market
The “invisible hand,” coined by Adam Smith in 1759, describes the unobservable market strength that shapes the supply and demand of goods in a free market. Imagine those goods as digital assets and the Stock Exchange as the exchanges that dominate the cryptosphere, and you’ve got a pretty good description of market makers. Despite being virtually subtle, they exist on the orderbook of every major exchange, absorbing the differential between maker and taker through meeting orders on both sides.
When a market maker is working well, the average trader should scarcely be apprised of it. Only the flurry of small bids and asks should give a clue as to its existence. Despite what Telegram business groups may lead you to believe, market makers won’t pump your bags or send your IEO tokens to the moon – but they compel provide liquidity, allowing you to enter and exit positions with minimal slippage. In the early days of bitcoin, the inclination of market makers to artificially match demand would have seemed absurd. Today, like so many other crypto market services, market makers are woven into its tapestry.
What are your thoughts on market makers? Let us know in the opinions section below.
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