The Role of Market Makers in the Crypto Futures Market | by LBank Exchange | Apr, 2023

From the LBank blog.

The Role of Market Makers in the Crypto Futures Market

In any financial market, the importance of liquidity cannot be overstated. A market with high liquidity is more likely to attract buyers and can be sold on easily without causing significant price fluctuations. This underscores the pivotal role that liquidity plays in cryptocurrency market making.

Have you ever wondered how you can buy or sell currency pairs in crypto futures at any given time? Crypto futures markets trade tirelessly around the clock but regardless, every single trade gets completed within seconds. This whole process is enabled by crypto market makers.

Typically, in cryptocurrency markets, there are market makers and takers. Market makers create buy or sell orders that are added to the order book, providing liquidity for the market. Takers, on the other hand, buy or sell cryptocurrency at the prevailing market price, filling the orders created by market makers.

This guide is going to focus on Market Makers and the essential roles they play in the crypto future market.

When you place a trade order, such as a limit order, on a centralized exchange’s order book, any subsequent trades originating from that order are considered maker trades. These maker trades add to the volume of the order book, thereby creating market activity. As a result, they are called makers.

You can think of a market maker as a mediator whose job is to create a virtual market for the trader. The moment traders place an order to buy/sell, the market maker carries out the trade, irrespective of the outcome of the market.

In crypto futures, market makers can be an individual or organization that buys and sells through a crypto exchange to offer liquidity while simultaneously earning profits through the difference in the bid-ask spread. In such a way, a market-maker offers services in both rising and falling market scenarios.

Market makers are the backbone of crypto trading, ensuring the trade floor runs smoothly by constantly updating their bid/offer spreads in accordance with market updates. This approach serves two important purposes: it provides traders with an accurate view of the market to aid in decision-making, and it ensures the efficiency and liquidity of currency pairs.

In conventional exchanges, market makers are employed to provide bid-ask quotes for assets during the day. Their primary responsibility is to keep the spreads within specific limits and ensure that orders remain open for a specified minimum period. By fulfilling these duties, they help to keep the exchange competitive and appealing to traders.

Nonetheless, the position of a Crypto Market Maker is particularly demanding due to the exceptionally unstable nature of cryptocurrency markets, which makes liquidity maintenance a significant challenge. Despite these challenges, market makers continue to play a vital role in ensuring seamless cryptocurrency trading operations and profitable outcomes.

In the world of cryptocurrency trading, exchanges provide a platform for buying and selling assets, but it’s the market makers who provide the crucial liquidity needed to ensure sufficient volume in the order books. Acting as intermediaries between supply and demand for securities, market makers facilitate smooth and timely transactions for traders, even in cases where assets have traditionally low liquidity.

Moreover, market makers are essential for maintaining price continuity in markets with narrow bid-ask spreads. This continuity signals strong liquidity and attracts more traders, resulting in greater profits for the market maker. Conversely, a lack of price continuity can lead to losses for market makers. Therefore, market makers play a crucial role in ensuring reliable and profitable cryptocurrency trading for all parties involved.

There are no free services in the crypto markets, and Market Makers are no exception. They earn money by purchasing securities at a lower price and selling them at a higher price, pocketing the difference.

So crucially, market makers generate income by exploiting the spread between the bid and offer prices. The extent of this spread is influenced by market liquidity and the size of the transaction.

Incentivizing liquidity provision is a common practice in exchanges, where makers are often offered reduced fees for their orders. For example, when you review LBank’s fee schedule, you will notice that LBank implements varying charges based on whether you act as a maker or a taker.

Basically, for a market to be considered a desirable trading environment, it requires a significant amount of supply and demand for the relevant asset. Then coupled with a high level of trading activity, this helps ensure orders are executed promptly. With this in mind, to help guarantee adequate liquidity and facilitate efficient trading on crypto markets, market makers are often enlisted.

Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.

This article came directly from the LBank blog, found on——2

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