In the previous article, we listed down some of the reasons why some exchanges do delist some coins from their exchange. This could vary from technical issues with implementations, security vulnerabilities, maintenance costs, failed project and lack of liquidity. In this article, we want to expand on the issue of liquidity on coins to avoid getting delisted.
Many coins and projects that have tokenized and are listed on exchanges do face this issue. After all, they need liquidity and volume in order to stay on the exchange and do attract new traders to trade and include their coins into their portfolios.
Some would choose the inorganic, fake and fast way of injecting liquidity into their coins. You guessed it right, through wash trading. Even though wash trading arguable could be used as fast or even maybe the cheaper approach to this, it may not be the best long term solution. One, because professional traders do and can spot wash trading activities on order books, two, many exchanges do not tolerate wash trading and do delist those tokens once they detect suspicious activities around those coins. For who would like to stay on track for a foreseeable future the best approach is to provide real liquidity to their coins.
Many Market Makers and liquidity providers focus on providing real liquidity to coins that either newly listed on exchanges or are lacking enough liquidity. There is a variety of off the shelf solutions available in the market. These solutions are known as Market Making Bots. Some of these bots are using as profit-making bots which do so with the typical approach to market making which is placing bids and asks on both sides of the market, be present in the market and compete and at last, make some profits from the difference in the spread and market movements.
Market Making bots are a good solution but perhaps not the best for a more sophisticated approach to market making. This is mainly because of limited parametrization available bots in the market. Another notable disadvantage of market making bots is that they are not built to manage and deal market fluctuations well when they occur, this is especially when the prices in the market are going down.
So what would be the best solution? Perhaps, more sophisticated market making algorithms and software that are configurable to different market situations. This is important especially because of risk management.
So what makes a good market maker when it comes to market that lack liquidity and in the danger of getting delisted, the following points are the most crucial in the liquidity provision journey:
- First and foremost, always-be-present-in-the-market. Constantly quoting in the market is an important criteria for improving efficiency and price discovery in an illiquid market.
- Reasonable quoting strategy. Quotes cannot exceed a specified percentage away from the best bid and offer
- Control the spread. Narrower spreads will induce both informed and uninformed traders to trade which in turn increases price efficiency and quickens price discovery.
- As an additional option, some sophisticated tools may be able to mirror instruments from other exchanges (usually more liquid exchanges) to get a good understanding of the market changes. This can be an issue because of volatility reasons, but some tools have a way around that.