The problem of market making in the crypto sector

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

These are essential liquidity providers that facilitate efficient trading by constantly maintaining both buy and sell orders.

Their role is to ensure high liquidity, reduced spreads, and stable prices in the crypto markets, thus facilitating efficient trading by continuously and consistently maintaining buy and sell orders.

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 the brands also exists in traditional markets, so much so that even before Bitcoin was born, in 2008, there were already more than two thousand in the USA, and even more than one hundred in Canada.

Technically, they are companies or individuals who simultaneously place both buy orders and sell orders for an asset held in inventory in the hope of making a profit on the difference, called the bid-ask spread or turn. The result is a certain stabilization of the market, and above all, a certain reduction in volatility, as they effectively set a price range for the asset.

The same SEC (Securities and Exchange Commission) in the USA defines “market maker” as companies ready to buy and sell shares on a regular and continuous basis at a publicly quoted price.

For example, in the currency market (the forex), most trading companies are market makers, which buy foreign currency from clients and resell it to other clients. They gain profit from the price differentials of trading (the spreads), in exchange for the continuous provision of liquidity to the market, the reduction of transaction costs, and the facilitation of exchanges.

In other words, they do not buy and sell to resell or repurchase later at higher or lower prices, but they buy and sell simultaneously at different prices, earning on the difference.

In their absence, trading would be significantly less efficient, because direct matches between buyers and sellers at the same prices would be required, something that often turns out to be practically impossible.

The consequence of all this is that the majority of transactions occur through market makers.

The role of market making in crypto markets

On traditional markets, in fact, the actions of any major operator can be monitored.

On the crypto markets, however, there are also entities of significant size that can operate outside the control of the authorities.

In theory, the market maker should operate completely independently from the exchanges, in order to prevent potential conflicts of interest. In the crypto markets, however, it is not clear how truly independent these two types of operators are from each other.

When any buyer places a purchase order on an exchange at a given price, for it to be completed, it requires another seller to place a sell order at the same price.

It is quite rare for this to happen, and this is where market maker come into play.

These place both buy orders and sell orders simultaneously, at different prices, in order to intercept all those orders placed by others that have not yet found a match. Since market makers sell and buy at the same time, their profit comes solely from the difference between the lower buy price and the higher sell price.

In this way, more buy and sell orders can be completed on the exchanges, and in this way, the same exchanges turn out to be more liquid.

The question is: how can we be certain that this activity is not being done by the exchanges themselves? And, in the event that they do, how can we be sure that they do not exploit the information that only they possess to manipulate the market in order to gain greater profits?

For this reason, exchange platforms should not engage in market making, but in the crypto markets, it is not clear if things are really like that or if there are exchange platforms that also engage in market making.

Furthermore, even if the market making were done by independent entities, how can one be sure that they do not have under-the-table agreements with the exchanges?

The main market makers in the crypto world

The existence of some market makers theoretically independent from crypto exchanges is known.

One of these is Jump Crypto, the favorite of institutional operators for its focus on security and solid risk management.

Another is Amber Group, whose business is primarily focused on the Asia-Pacific region.

Other well-known names with Wintermute, a global algorithmic market maker that engages in high-frequency trading (HFT) specializing in digital assets, Cumberland, a subsidiary of the renowned trading company DRW, and Virtu Financial, one of the leading electronic trading companies listed on NASDAQ.

Lately, for example, there has been a lot of talk about Wintermute because it is known to work with some of the largest crypto exchanges in the world, including Binance and Crypto.com.

The fact that it is also a high-frequency trading company, as well as a market maker, leads many to suspect that it may benefit from its market making activity at the expense of users.

However, it should be remembered that even the same small retail traders in theory can operate as market makers, even if with enormously lower volumes, particularly by placing limit orders.

The problem is that many users do not use limit orders, and therefore are effectively at the mercy of the market makers. For this reason, when buying or selling crypto on exchanges, it is always recommended to do so with limit orders, especially when the amounts involved are somewhat significant; otherwise, there is a serious risk of ending up paying not only the sellers or the buyers but also the market makers.

Often those who prefer not to use limit orders do so because they want their transactions to be executed immediately, and this can often only happen by taking advantage of the activity of market makers. Therefore, the price to pay for immediate execution is often a larger spread, which will be collected by the latter, while the alternative requires a bit of patience.

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