How Does a Market Maker Make Money?
Market makers are financial firms engaged in a market-making program where they buy and sell assets at the market price, forming prices for other market participants. Centralized exchanges hire such companies to maintain a required liquidity level on their trading platforms.
Market makers are crucial players in a financial market, be it traditional stocks or digital assets, as they create liquidity, which is the lifeblood of every trading environment. Market makers are financial firms or high-frequency traders engaged in a market-making program where they buy and sell assets at the market price, forming prices for other market participants. Centralized exchanges (for example, Coinbase of WhiteBIT) hire such companies to maintain a required liquidity level on their trading platforms.
What Forms a Crypto Market Maker’s Profit?
Market makers earn from bid-ask spreads (the difference between the price they buy an asset and the price they sell it). For example, a market maker buys SOL at $96, sells it for $96,10, and pockets the difference.
Market makers also make money by charging fees for providing liquidity on tokens or exchanges where they trade. These designated market makers have agreements that outline specific parameters for them to provide liquidity as required by the platforms they work with.
What Affects Crypto Market Makers’ Earnings?
Market making is a highly risky business - market makers have to fulfill trading orders regardless of the market situation. For example, when an asset is massively sold, a market maker has to buy it and manage risks associated with holding the asset that is losing its value. That is the reason why market makers are professionals and specialized companies with expertise in trading and risk management.
Here are the factors affecting a market maker’s profit:
A wider bid-ask spread means a higher profit per trade for a market maker. However, on the other hand, the wider the spread, the fewer trades because traders are looking for a tight spread. Market makers aim to shorten the spread and compensate it with a bigger number of trades per day.
The more traders are fulfilled and the higher the trading volume, the bigger the market maker’s profit.
In times of heightened market volatility, market makers may experience higher profits from increased volumes and wider spreads. However, this also exposes them to a greater risk of imbalances in positions and potential losses.
Conclusion
Crypto market makers’s work is to continuously place buy and sell quotes for other market participants, enabling their smooth trade execution at market prices. As experienced traders, market makers aim to reduce bid-ask spread while making a profit by fulfilling a large number of deals per day. A market maker’s success depends on such factors as trading volume, volatility, and risk management strategy they implement to quickly react to market changes.
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