Liquidity is a crucial factor for traders and investors as it affects the efficiency and cost-effectiveness of transactions in the crypto market. It refers to the ease with which crypto can be bought or sold in the market without causing significant price changes.
Liquidity provides the smooth functioning of crypto trading exchanges, and it especially refers to an institutional trading platform, where investors operate with large amounts and want to do it without obstacles or delays.
To maintain liquidity at a sufficient level, platforms attract market makers. So, what is market making in crypto and what benefits do they get for providing liquidity to trading platforms? Let’s figure it out in this article.
What is Crypto Market Making?
A market maker is an entity, typically a financial institution or a specialized firm, that facilitates liquidity in the market by continuously providing buy and sell quotes for various crypto assets. Unlike individual traders, who may participate in the market from time to time, market makers play a consistent and active role, ensuring that there are always counterparties available for traders looking to execute buy or sell orders. In return for added liquidity, crypto platforms provide many benefits for those who “make the market”.
Benefits for Market Makers on Institutional Trading Platforms
Here are some advantages crypto platforms may offer to market makers:
- Transaction fee rebates. Many institutional trading platforms offer transaction fee rebates to market makers. The more liquidity a market maker brings, the more favourable the fee structure becomes.
- Priority in order execution. In situations where there are multiple orders at the same price, the market maker’s orders may get executed first, enhancing the speed and efficiency of their trading activities.
- Access to advanced trading tools. Trading platforms may provide market makers with access to advanced trading tools and analytics. These tools assist market makers in making decisions, optimizing their trading strategies, and staying competitive. They may also use a crypto market maker bot, helping to automate the process according to the chosen strategy.
- Reduced spread costs. Market makers aim to narrow the bid-ask spread, which is the difference between the buying and selling prices of an asset. Institutional platforms may offer reduced spread costs to market makers, making their trading activities more cost-effective.
- Incentives for large order sizes. Market makers that handle large order sizes may receive additional incentives. This encourages market makers to facilitate trading in larger volumes, contributing to overall market liquidity.
- Strategic partnerships. Institutional platforms may establish strategic partnerships with market makers. These partnerships can lead to mutually beneficial collaborations.
Market makers play a crucial role in ensuring liquidity and efficient price discovery in the crypto market. Institutional trading platforms recognize their significance and offer various benefits and incentives to encourage their active participation.