The market maker is a firm or individual who provides bids and asks to trade a digital asset in a certain volume and for a regular price. Thus, it provides liquidity and creates the stability of demand to make the market function properly.
What is a market maker needed for?
Any new asset that starts to be traded on an exchange is potentially unstable. The risks involve the unpredictable actions of investors, lack of liquidity, sudden rise or drop in trading volume, etc. A market maker is able to control the situation and ensure the common market flow.
Which tasks does a market maker fulfill?
A market maker is a provider of stable trading processes in the market. To achieve this, it fulfills the next tasks:
- Avoid price spikes. The market maker holds the spread (the difference between the bid and ask price) within strict limits. Thus, the movement of price is smooth, without any price spikes.
- Liquidity creation. A continuous flow of buy-sell operations is based on a permanent number of trading requests. It makes any transaction possible for any individual, regardless of its size or price. So the market maker provides the necessary transaction volume to make the trading process fast, efficient, and easy.
- Mediation in major transactions. If the exchange lacks liquidity and is unable to hold a one-time large transaction that can disrupt the stability of the market, it can refer to market makers. Thus, a market maker will conduct an operation bypassing the exchange and becoming an intermediary between a large buyer and seller.
Who hires market makers?
As market makers improve the trade potential, they are usually hired by companies wanting to increase the efficiency levels of a particular digital asset. The exchanges can also hire market makers for the same reason.
Are there any pitfalls regarding the market makers?
Let’s look at the ways they earn money:
- Spread. The difference between an ask and bid price is minimal, but the trading volumes allow market makers to receive the income.
- Service payment. It’s no secret that market makers charge exchanges or other companies interested in their services payment.
- Arbitration. The market makers implement different arbitrage strategies using the inefficiency of some markets.
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