What is a market making bot?
Market making bot is an automated investment strategy that is used to provide liquidity, by filling up the order book with buy and sell orders, so that other market participants, buyers and sellers alike, could execute their orders whenever they need to. So market maker plays a special role in the financial ecosystem by building trust in the market.
How does a market making bot work?
The MM Bot constantly quotes buy and sell orders on both sides of the order book with a defined spread (the spread is a difference between ask price and bid price). The algorithm has a few characteristics that make it different from other algos:
- It has to be super fast to react quickly to changes in the market before other investors will.
- It has to be fully automated.
- It has to minimize the risk of adverse price movement.
Who are market makers?
A market maker is a company or individual that regularly buys and sells financial assets at a publicly quoted price to provide liquidity to the markets. Their role is to satisfy market demand. Market making is also used as a profit generation trading strategy by hedge funds.
Why do exchanges need market makers?
New exchanges and exchanges with low liquidity need market makers to attract other investors. The market makers, however, do not want to enter illiquid markets as there is not much volume to be made from takers and there is also additional business risk involved.
Hence many illiquid exchanges need to pay market makers for their services.
How market makers make money?
They make it basically in two ways:
- On the spread between the quoted bid and ask orders. Executing thousands of small transactions, earning on each more or less the spread value adds up when the risk is properly managed.
- Secondly, sometimes they are additionally renumerated by the exchanges (share of the taker fee) or token issuers.
And last but not least, because of lower (or even zero) transactional fees, other investment strategies they use may be even more profitable.