Crypto Market Making: Market Makers and Market Takers

IIn any financial market, there are two participants – the market maker and the market taker. Just like traditional financial markets and other trading exchanges like Forex, stock exchanges, equities, etc.

The market maker and the taker form the lifeblood of the cryptocurrency market and exchanges as well. Without these two players, a viable crypto market cannot exist. These two entities create liquidity and create a favorable condition for trading, knowing their roles can help you optimize your crypto market making strategy.

Before diving deeper into their roles, let’s understand what market liquidity is.

Understanding Market Liquidity

Market liquidity determines the efficiency of a market.

A market is said to be highly liquid if it allows seamless trading of assets at fair values. It also indicates that the demand and supply of traders who want to buy and sell the crypto assets are balanced and high.

In such markets, there is a balance between the ‘ask’ price (the lowest value for placing a sell order) and the ‘bid’ price (the highest value to place the buy order).

The difference between the ‘ask price’ and the ‘bid price’ is known as ‘bid-ask spread', and is relatively low in a highly liquid market.

On the other hand, in a low-liquid market, there is less demand for the asset, leading to a wider bid-ask spread, increased price volatility, and challenges for traders to get a fair price for their assets.

Market liquidity attracts more institutional investors and accommodates orderly trading of transactions.

Who are crypto market makers?

Market makers are individuals or entities that provide liquidity to a market by consistently placing buy and sell orders on an exchange. They play a critical role in stabilizing markets and ensuring smooth trading.

How Market Makers Work

Almost every trading platform maintains an order book, even in crypto trading.

An order book is a manual or electronic record that contains a list of participants, the prices at which the assets are being bid or placed, the prices of the sell and buy orders, and the order history.

The order book maintains the real-time asset price and lists the highest price and lowest bid of the day.

Market makers are individual traders or designated members of an exchange who help to buy or sell assets at the current bid price. Market makers are liquidity providers (LPs) who hold the assets and make profits from the bid-ask spread.

Traders who want to upload an asset in the order book pay the ‘ask’ price, which is a bit higher than the market value.

Traders who want to offload crypto assets pay the ‘bid’ price, which is slightly lower than the ‘ask’ price.

Market makers make a profit out of this difference, or bid-ask spread, and also earn commissions as LPs in the market. In most markets, makers pay lower fees compared to takers as they are the liquidity providers.

Designated Market Makers and Automated Market Makers

Designated market makers, or DMMs, are appointed by exchanges against security.

They are primary market makers who have the power to maintain quotes for buying and selling assets on trading platforms. DMMs have high expertise and can make hundreds of markets at one time.

On the other hand, an automated market maker, or AMM, works autonomously on a decentralized exchange platform. AMMs operate on smart contracts to provide liquidity to the exchange.

AMMs eliminate the barriers of centralized exchanges and order books and allow autonomous protocols through which users can initiate a trade through their personalized crypto wallets.

They create liquidity pools where any liquidity provider can participate and earn a percentage as fees for transactions executed on the exchange.

Who Are Market Takers?

As simple as it may sound, while the market maker makes liquidity, the market taker takes liquidity. They execute trades by accepting existing orders in the market.

Market takers work in concert with market makers. They need immediate liquidity to make a trade in the exchanges. Traders and investors are market traders who make earnings out of the price movements.

Market takers take less risk and do not change their positions in the market as often as market makers.

They prefer to liquidate assets immediately instead of waiting to make a profit from the bid-ask price difference. Generally, takers pay more fees than makers, because they do not generate liquidity in the market.

Market Makers vs. Market Takers: Key Differences

Market Makers

Role: Provide liquidity by placing limit orders.

Trading Approach: Passive; waits for orders to be matched.

Primary Goal: Capture the bid-ask spread.

Impact on Market: Increases liquidity.

Market Takers

Role: Consume liquidity by executing orders.

Trading Approach: Active; initiates immediate trades.

Primary Goal: Execute trades quickly.

Impact on Market: Reduces liquidity.

Why Understanding Market Makers and Takers Matters

For both novice and seasoned traders, understanding market maker and taker dynamics is crucial:

• As a Maker: You can earn from the bid-ask spread while contributing to market health.

• As a Taker: You must account for trading fees, which are often higher than maker fees on exchanges.

What is Market Making in Digital Assets?

Crypto Market making is the process where market makers try to generate continuous liquidity for the traders, sellers, and buyers in the market. Market makers provide stability and accessibility to liquidity to investors and traders.

Market making provides critical help and stability to the market. It:

• Provides liquidity

• Establishes fair prices for trading

• Ensures profitability through bid-ask spreads

• Eliminates price volatility

• Attracts big institutional investors

• Maintains order books that ensure security and less slippage as it records the entry and exit of all traders

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The Maker-Taker Relationship in Crypto Trading

The maker-taker relationship in crypto trading is vital to facilitate the growth of the crypto market and attract big investors. By working in tandem, makers ensure liquidity while takers maintain trading activity. This dynamic:

• Reduces volatility and friction.

• Encourages stable growth.

• Ensures more liquidity in the market and more profits through bid-ask trades.

The Biggest Market Makers in Crypto

Some of the biggest market makers in crypto include well-known firms and platforms specializing in liquidity provision. These firms deploy advanced trading algorithms to optimize market performance. Examples include:

• Jump Trading

• Wintermute

• GSR

• Flow Traders

• Kairon Labs

These players not only stabilize the crypto market but also drive its growth by supporting trading activity on smaller and emerging exchanges.

Bottom Line

Market makers and takers are the pillars of the cryptocurrency trading ecosystem. Market makers provide the liquidity necessary for efficient trading, while market takers bring activity and volume to the market. Together, they ensure the market remains active, liquid, and profitable for all participants.

Whether you're looking to refine your market making crypto strategies or understand how trading fees affect your bottom line, these roles are fundamental to navigating the world of cryptocurrencies.

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