Market making in the cryptocurrency industry is a whole new animal when compared to traditional market makers. While some of the fundamentals are still present, digital assets present unique market-making opportunities.
To discover how crypto market making is taking shape, we’ll look at some of the top crypto market making providers of 2020. But first, let’s dig in a little to understand what market makers are, how traditional market makers differ from their crypto counterparts, and why the trading industry needs them all.
What is Market Making?
Market making is the business practice of creating more markets for traders to buy and sell assets in order to increase liquidity. Generally, traders closely watch the markets and when they see an opportunity, they want the ability to make a trade immediately. That’s why they go to a market maker. Because otherwise, they’d have to find a corresponding buyer or seller of the same asset, at the same price, at the same exact time, and then wait for the order to be filled.
This wait time can cause multiple, stacking problems within a market, such as:
- The level of liquidity decreases.
- Lower liquidity can also lead to higher trading costs as the difficulty and length of time to enter or exit a position increases.
- Lower volumes result from the lack of liquidity, which may also damage investor confidence.
Marketing making = liquidity building
Market makers help to increase liquidity by filling these trade orders, even if they don’t yet have a buyer or seller lined up on the other end. For instance, if a trader places a sell order for 100 shares of Apple with a market maker, the market maker will fulfill the order immediately. Even if they don’t yet have a buyer lined up. In the simplest sense, that is what ‘making a market’ means.
It may seem a little risky for market makers, especially if there are price changes between the sell and buy orders. But there are several ways in which they can hedge their risk:
- They maintain a spread on each asset they cover – Basically, they charge a very small fee for fulfilling the order. But because they make so many trades, the spread offsets their risk.
- They utilize algorithmic trading tools and a system of automated market making, both of which run on real-time trade data.
Market makers are able to initiate these trades for their customers by having accounts with exchanges. Sometimes they are individual accounts, but most often it’s an institutional account. Used to service their clientele. In this way, they have direct access to the order books of the exchange they use.
How is a crypto market maker different?
Traditionally, it has been the banks and brokerage houses who have offered market-making services. But in the crypto era, market makers have evolved to offer new kinds of services that cater specifically to the digital asset industry. Here are some of the ways that crypto market makers are different from their legacy predecessors:
- The crypto market never sleeps; markets operate 24/7. Additionally, most market makers in the crypto space list “24/7 monitoring” by their respective experts as an advantage.
- Exchanges specifically for crypto have grown rapidly in numbers in the face of blockchain innovation and hundreds of new cryptocurrencies.
- Liquidity is even more important in the crypto market because it will help make a token appear stable in what is now a very volatile market.
- The exchanges that deal with cryptocurrencies are very new and also very large in number. Whereas with stocks, you have a certain number of stocks and a relatively small number of long-established exchanges (i.e. NASDAQ, NYSE).
With the booming influx of cryptocurrency and token projects, the need for market-making has grown exponentially. This is especially so for projects with new digital assets, who are trying to get their trade volumes up. But in order to be listed on an exchange, they must often face volume requirements.
To bridge this gap, market makers can help by infusing liquidity and thereby enabling volume growth. Once a crypto project has some liquidity, it’s easier to build investor confidence, which can help with increased trading volume as well with getting listed on exchanges.
In the recent past, teams planning an ICO, for instance, would need to search for market-making services using word of mouth referrals. Crypto market making is a new industry that has emerged because of the sudden need for such services. Such platforms may eventually replace the word of mouth system.
Now, token projects and institutional investors wanting to optimize their crypto trading strategies are looking to these crypto market makers.
Looking to market makers for liquidity
Because crypto markets are in such an early stage, we’re seeing an influx of new cryptocurrency projects that want to bring their coin to market. When it comes to new altcoins, however, the initial shortage of buyers and sellers leads to insufficient liquidity.
A liquid traded asset may be bought and sold frequently without heavily affecting the price, mainly due to the number of buyers and sellers willing to trade the liquid asset. Without liquidity and some price stability (which often follows), it’s difficult to get trades going on these new tokens.
The lowest point for a digital asset is when it is first issued and listed on an exchange. Not surprisingly, using market-making services during this time is crucial for the project behind the token. Trades in the brand new asset need encouragement so that early investors who are selling off have a market for the new token. Liquidity is necessary to get trade volumes up to be listed on more exchanges. Market makers fill this need by:
- Helping to create a market for that token
- Guiding the project’s token towards its own price discovery
- Stabilizing the price for future trading and growth
- Making sure there are plenty of orders on both sides of the order book
- Maintaining tight price spreads, which allows investors to know there’s a healthy order book for that asset
We’ve covered how traditional market-making has evolved within the crypto industry. Now, it’s time to check out our list of top crypto market making provides for 2019:
Top Crypto Market Making Providers 2021
#1 – AlphaTheta
The AlphaTheta team draws on its vast experience in finance, trading platforms, data analysis and blockchain technology to provide “smart market solutions” as well as guidance for traders navigating the complex crypto markets. Their mission is to provide liquidity support for enhancing token marketability while building stable tokenomics models.
Their in-house team of engineers has been developing robust algorithms that are designed specifically for cryptocurrency market making. A proprietary interface has also been designed by the team, built from the ground up.
Liquidity services provided by this market maker include algorithmic trading, deployable bots, customized strategies, and exchange support. In addition, the platform enables matching orders, reducing spreads and increased market depth. AlphaTheta maintains ethical and compliant operations and is completely data transparent – clients can stay up-to-date with their market when using the AlphaTheta platform.
#2 – GSR Markets
This Hong Kong-based market maker has been a leader in algorithmic trading since 2013. With over $5 billion in trades on 20+ exchanges, GSR claims that their volume enables them to offer the lowest fee schedule.
GSR’s institution-grade liquidity software was built in house by its team of developers coming from IBM and Oracle in conjunction with quantitative traders from Goldman Sachs, Two Sigma and Tower Research.
As part of its growth strategy, GSR has been developing cross- and intra-exchange arbitrage opportunities. The team works to quicken the adoption of cryptocurrency coins and tokens by driving volume both on exchanges and in the OTC markets.
#3 – Kairon Labs
Out of the Netherlands and Belgium, Kairon Labs focuses on more personalized services and as such have decided to remain relatively small. Their focus lies in customized solutions in tandem with bots that are overseen by experienced traders.
Kairon’s specialty in the crypto market-making industry is utility tokens and stable coins. For that purpose, they’ve developed a proprietary trading software. While they maintain accounts at over 120 exchanges on behalf of their clients, they also are in talks with exchanges for direct access.
Clients with Kairon Labs enjoy low-cost fees and a profit split as well as algorithmic trading services specifically for digital assets.
#4 – Bluesky Capital
At Bluesky Capital, their mission is to assist high net worth individuals, family offices and institutional investors reach their investment goals through multiple quantitative investment strategies.
The Bluesky team boasts extensive experience in quantitative hedge funds and research, and have come from companies including Morgan Stanley, Merrill Lynch, and Sauma. They’ve devised a programmatic macro investment program that covers all asset classes. Additionally, they offer high-frequency trading for crypto as well as a crypto hedging program.
With an emphasis on quantitative research, Bluesky targets alpha discovery and cutting edge investment technology. Their goal is to provide superior, risk-adjusted returns for all their investors.
Crypto market makers have filled a huge need in the rapidly advancing crypto markets. Hopefully, this list of the top market-making providers provides clear choices for projects and investors so they can find the platform that works best for them.