Market Maker Trading Strategies
With the growth of institutional trading of crypto, the need for sufficient and stable liquidity on the markets has grown too. Institutional trading implies operating with large trading volumes, and there must be enough liquidity to fulfill such trading orders. Who stands behind successful trading if there’s no “natural” buyer or seller for assets at the moment? - That’s a crypto market-making company, that helps traders and investors conduct their trades in large amounts and at any time. Due to market makers, investors can conduct transactions quickly and efficiently, with no delays. In addition, market-maker trading helps maintain a healthy trading environment and continuous demand and supply for assets.
How Does Market Making Work?
Market markets act as middlemen between assets buyers and sellers. They continuously place buy and sell prices on a trading pair by adding orders to an order book. On the flip side, there are market takers who fill those orders by buying or selling tokens at a given price. The orders are placed very frequently, allowing to reduce the market volatility.
Market makers' mission is also to cut bid-ask spread, facilitating the formation of fair prices and reducing volatility. At the same time, market makers earn from the bid-ask spread, and the high trading volume and frequency of placing and executing orders help amplify their profits.
What is Market Making Strategy?
Market maker trading is a risky undertaking - sharp market jumps impose a lot of risks, forcing market makers to take proactive steps in adjusting their bid-ask spreads. Market makers use different strategies to take the most of the market volatility and manage risks properly:
- Delta neutral market making - a market maker places an order on one platform and when it is fulfilled, he places another order in the opposite direction on another platform. These equal opposite orders on two platforms eliminate the risk of losing funds on one platform by taking a profit on another one. As a result, the market maker gets zero on token price movement and earns from the spread.
- High-frequency market making - the idea is to place optimal buy and sell prices while managing inventory risks to maximize profit. A maker applies statistical probabilities and techniques to determine the most optimal bid and ask prices.
- Grid trading - placing limit orders on the order book that are increasing at intervals of the moving average of price. A market maker makes a profit when the price moves through those orders through the trading period.
Final Word
The presence of market makers is crucial for creating vibrant and accessible cryptocurrency markets. Utilizing market-making strategies helps traders generate profit, reduce bid-ask spreads, manage risks, and ensure overall market stability.
