What Is Market Maker?
Also known as: Market Maker, Market Making, MM
In short
A market maker is an institution or individual that provides liquidity by continuously placing both buy and sell orders in the order book for an asset, earning income mostly from the bid-ask spread.
Market makers bridge buyers and sellers by placing, for example, a buy order at 99.9 dollars and a sell order at 100.1 dollars for a coin, aiming to earn this small difference across many trades during the day. Thanks to this activity, the order book deepens, the spread narrows, and other investors can execute their trades with less slippage.
In the cryptocurrency market, market makers are generally professional firms operating with algorithmic trading software. Exchanges may offer these firms low fees or incentives to increase liquidity. New projects also make agreements with market makers so there is enough liquidity on the exchanges where their tokens are listed; arrangements such as token loans and options are common in these agreements. On decentralized exchanges, this role is taken by automated market maker (AMM) protocols and by users who deposit assets into liquidity pools.
Market making also carries risk. During sharp price moves, market makers can incur losses or pull their orders, causing liquidity to dry up suddenly. In malicious practices, they can also be involved in manipulation such as creating artificial trading volume (wash trading), so transparency is an important topic of debate.
Last updated: · This content is for information purposes only and is not investment advice.