What is Market Maker? Characteristics and roles of market makers

The term Market Maker is increasingly popular in the cryptocurrency sector. As both buyers and sellers, market makers are playing an important role on exchanges. So what specifically is Market Maker? What are the characteristics and roles? To learn more about Market Maker in the market, follow Finhay’s article below!

What is Market Maker?

Market Maker (abbreviated as MM) includes two main words: Market and Maker, so it can be understood that Market Makers are market creators.

Maker Makers are also known as Whales in the market as they both play the role of providing liquidity or creating opportunities for many people to participate in market transactions, making large purchases and sales of stocks, coins, currency and other derivative products.

This helps create liquidity in the market and helps transactions take place quickly and smoothly. Without MMs, the market would be less liquid. This will make transactions difficult for investors.

How do Market Makers make profit?

In essence, Market Maker is a business with the ultimate goal of making a profit. However, Market Makers will also bear the risks of price fluctuations. To compensate for these risks, Market Maker will apply a fee called the spread. This is the difference between the buying price and the selling price. When investors want to trade, they need to pay a certain spread fee based on the product they choose.

For example: An investor searches for stock codes to trade at a stock brokerage.

At this time, the broker listed the buying price for that stock at 100 USD/share and the offering price at 100.05 USD/share. This means that Market Maker as a broker will buy the stock at a price of 100 USD, then they sell it to the buyer at a price of 100.05 USD/share. Through high volume trades, small spreads combine to create huge profits.

Characteristics and roles of Market Maker

In the financial world there are many different types of markets. With many extremely important roles in the market, Market Maker is an indispensable part of the financial market.

High frequency trading

One of the most necessary reasons for the emergence of a market maker is to increase liquidity. The most commonly applied way to accomplish this purpose is high frequency trading (HFT).

This is a trading method that uses powerful computer software. This program allows us to trade a large number of orders in a very short time. It applies complex AI algorithms to continuously analyze the market.

Some machines are capable of executing commands based on pre-programmed conditions without human intervention. High-frequency trading is often associated with Scalping strategies (transactions that take place in a fairly short period of time) during the trading process.

Market Maker powers the marketplace

The way Market Maker supports the market is by increasing market depth with the ability to maintain large orders without affecting the price of the asset. Market makers also support liquidity and ensure stability for transactions.

Increase market depth

Market depth represents the number of buy and sell orders waiting to be matched in the market. The market maker will place limit orders at various prices and wait for the Market Taker to match the market order with their pending order.

Market Takers are traders who accept the prices given by the market. All Market Maker orders will be added to the order book. This will increase market depth, ensuring assets are traded quickly according to buyers’ orders.

Liquidity support

The main task of Market Maker is to maintain continuous trading and competitive markets. Because markets are not always competitive, market makers need to support liquidity. With the advantage of large capitalization, Market Makers can increase supply volume when there is sudden demand and vice versa.

The contribution of market makers helps keep the exchange running smoothly. In addition, MM also helps investors feel secure in trading without having to deal with liquidity problems.

Ensure stability

An additional role of the Market Maker is to keep the value differential between exchanges competitive. Market makers ensure stability and spreads within reasonable levels for traders to make transactions. Thanks to the advantage of large capitalization, MMs will help investors benefit when the market develops stably.

Suppose, an investor is holding a large volume of stock X. While the market is falling sharply, the investor wants to sell the stock but no one is buying. Thanks to market making operations, MMs will help limit the overselling of stock A by placing buy orders into the market. Therefore, investors will have the opportunity to sell this stock to limit losses.

At the same time, Market Maker maintains the market to avoid waves of sell-offs. The extent to which this stability is guaranteed depends on the agreement between the market maker and the exchanges.

Difference between Market Make (MM) and Automated Market Maker (AMM)

Market Maker & Automated Market Maker have 2 main differences:

For Long-Tails Assets, Automated Market Maker is a better liquidity solution.

Both MM and AMM are good solutions to provide liquidity for trading assets in the market. However, in reality, MMs rarely accept creating Markets for Long-Tails Assets due to some of the following characteristics:

• The trading volume is neither high nor sustainable.
• Strong price fluctuations often occur.

In essence, MM operates mainly to make profits. Creating a trading market for LTAs does not yield high profits and is quite risky, and will not be the best choice for them.

With AMMs in the cryptocurrency market, liquidity is provided to any user or asset according to the AMM model. Therefore, at present, AMM will be more suitable as a liquidity solution for Long-Tails Assets in the Crypto market.

Transaction fees

Additionally, transaction fees are the difference between AMM and MM. For investors, trading fees on the Market Maker market are much lower than Automated Market Maker. We can see this through the transaction fees of Binance and Uniswap as follows:

• The standard fee on Binance is 0.1% and the fee on Uniswap is 0.3%.
• Exchanges like FTX have lower trading fees than Binance’s, ranging from 0.02% to 0.07%.

This mainly comes from risks in providing liquidity to the markets. With markets created by Automated Market Maker, liquidity providers are subject to greater risk than liquidity providers in markets created by Market Maker.

Top 5 largest Market Makers in the cryptocurrency market today

Currently, which is the largest Market Maker in the crypto market? Let’s take a look at the 5 biggest names in this field.

Alpha Theta

Alpha Theta is currently headquartered in Toronto, and is an expert in finance, analytics and Blockchain technology. To develop to where it is today, this Market Maker has made constant efforts to participate in various large and small projects. Alpha Theta has the most talented team of engineers creating algorithms specifically designed for the crypto market.

Alpha Theta follows a customer risk assessment strategy and regulatory requirements to comply with anti-money laundering laws in its operations. They also have data transparency, allowing investors to monitor market activity. An investor can use robots to execute his different strategies on multiple exchanges.

GSR Market

This is an algorithmic crypto trading company in Hong Kong. GSR Market provides customers with exceptional services, expertise as well as trading that suits their abilities. The company uses its own software so it has high liquidity. GSR Market’s strong leadership team, technical and financial team come from the world’s second-largest financial institutions.

The company designs highly intuitive risk management strategies with proprietary trading technology that can be customized to trading needs. Their sales strategy will be adjusted depending on liquidity and real-time market fluctuations, so investors get the best price.

Alameda Research

As a long-established company, it can be said that Alameda Research is currently the largest and most reputable company in the cryptocurrency market. Today the company holds more than $100 million in digital assets.

Based on their solid technical research, the algorithms are completely market neutral. Alameda Research has the trading advantage of strong market-making partnerships.

Besides, Alameda Research’s development staff are all experienced members from giants like Facebook and Google. Therefore, this market maker can trade on many exchanges and operate fully globally.

Kairon Labs

Kairon Labs, currently based in the Netherlands and Belgium, uses proprietary software to provide Market Makers with the tokens they use most effectively. Kairon Labs is a reputable MM with high expertise in the field of cryptocurrency.

Compared to competitors, Kairon Labs has the advantage of lower fees, profit distribution, and algorithmic trading of cryptoassets. The company extremely values the reputation of the brand. The team includes several reputable crypto traders who helped projects during the 2017 crypto bull market.

Bluesky Capital

Bluesky Capital is a team of experts in quantitative hedge funds. This group includes prestigious companies such as Morgan Stanley, Sauma, and Merrill Lynch. They create a programmatic macro investing program that covers a variety of asset classes.

In addition, Bluesky Capital provides risk insurance for the cryptocurrency sector. With a focus on quantitative research, Bluesky Capital aims to detect alpha along with cutting-edge investment technology. The company’s goal is to provide risk-adjusted profits for investors.

Above is important information about “market makers”. Through this article, we hope readers have been provided with complete information about Market Maker. Through this, investors will understand what Market Maker is as well as their importance to the Vietnamese and world markets.