What is Market Making Trading and How Does It Work?

When you place an order for buying or selling digital assets on a trading platform, you usually don’t reflect on who’s there on the other side of your trade. And why would this “someone” be willing to buy the assets you are willing to get rid of here and now?

Indeed, at any given point in time, there are many market participants, such as traders, institutional investors, asset managers, and funds representatives, buying and selling assets just like you do. Some of them are acting and trading on behalf of pension funds, investing in assets, while professional asset managers sell those assets to rebalance a portfolio. Or maybe that’s part of a dollar-cost averaging strategy where investors buy a few assets monthly regardless of their price.

All these market participants are motivated to trade with you. However, they don’t need to be willing to do it right when you want and at the price you ask. Who then fulfills trading orders if there’s no natural counterparty at this point in time? That’s where a market maker comes in.

What Do Market Makers Do?

trading

Market makers are institutional investors, asset managers, funds, banks, and high-frequency traders that are actively placing orders in the crypto market. How does market-making work? Their task is to place buy and sell orders on specific assets during the day, fulfilling any appearing order in the order book. They play a crucial role in times when there are no natural buyers and sellers for a given asset. In such a way, they provide liquidity to a market maker platform.

The difference between the buying and selling prices is called “spread” and this is what a market maker receives as a profit. The goal is to make the spread as short as possible, contributing to the attractiveness and competitiveness of a crypto exchange.

Features of the Best Software for Market Making in Crypto

trading Crypto

Features of an ideal crypto market-making software:

  • Automation. An automated market-making bot can be used for trading on centralized and decentralized platforms.
  • Consistent spread. A bot that provides consistent spread provides more profit for a market maker.
  • Maintain liquidity. A bot must have the potential to support liquidity at a required level. It can be managed through the link to trading exchanges like Binance or through API endpoints.
  • Adaptive. It should be able to adapt to changing strategies through customizable algorithms.

Conclusion

Market making in cryptocurrency allows for order execution at any time of the day and in any amount when there are no natural counterparties to buy or sell assets at this point in time. Market makers are bridging the gap between natural buyers and sellers of crypto.

Images courtesy of unsplash.com and pexels.com

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