Operating in the Crypto Markets

Operating in the crypto markets involves not only retail and whales, but also market making services.

These essential liquidity providers facilitate efficient trading by constantly maintaining both buy and sell orders. Their role ensures high liquidity, reduced spreads, and stable prices, thus making trading efficient.

Summary

• How market making works
• The role of market making in crypto markets
• The main market makers in the crypto world

How Market Making Works

The service of market makers also exists in traditional markets. Before Bitcoin’s introduction in 2008, over two thousand existed in the USA, with more than one hundred in Canada.

Technically, they are companies or individuals who place buy and sell orders for an asset held in inventory, hoping to profit from the bid-ask spread. This stabilizes the market and reduces volatility by setting a price range for the asset.

The SEC in the USA defines “market maker” as companies ready to buy and sell shares continuously at a publicly quoted price.
For example, in the forex market, most trading companies function as market makers, buying foreign currency from clients and selling it at a profit from price differentials or spreads.
In essence, they simultaneously buy and sell at different prices, earning from the difference. Without them, trading efficiency dramatically decreases, as direct matches at the same price between buyers and sellers are often impractical.

The Role of Market Making in Crypto Markets

In traditional markets, actions of major operators can be monitored. In crypto markets, certain entities can operate outside authority control. Ideally, market makers should operate independently from exchanges to avoid conflicts of interest, but it’s unclear how independent these entities truly are.

When a buyer places a purchase order at a specific price, it needs a seller to match it at the same price, which is rare. Market makers solve this issue by placing both buy and sell orders at different prices, enabling more transactions on exchanges and increasing liquidity.

However, concerns arise about whether exchange platforms themselves may engage in market making and exploit proprietary information for profit. Thus, exchange platforms should refrain from market-making activities, though clarity is lacking in current crypto practices.

The Main Market Makers in the Crypto World

There are some theoretically independent market makers in crypto. Jump Crypto is favored by institutions for its security focus, while Amber Group mainly operates in the Asia-Pacific region.
Other prominent names include Wintermute (a global algorithmic market maker specializing in high-frequency trading of digital assets), Cumberland (a DRW subsidiary), and Virtu Financial (a leading electronic trading company).
Recently, Wintermute gained attention for collaborating with major exchanges like Binance and Crypto.com. Although being a high-frequency trading company, some suspect it may exploit its market-making role at users’ expense.

Significantly, even small retail traders can act as market makers by placing limit orders, despite operating at much lower volumes. Many users, however, neglect limit orders, putting them at the mercy of market makers. It’s advisable to use limit orders for significant transactions to avoid paying excessive spreads, which are earned by market makers. Many users prefer immediate execution, which often requires utilizing market makers, with the trade-off being a larger spread.