You want to avoid black-box market-making services, with no insights into how it is managed by your partner. We set up automated, adaptive market-making strategies, but you always have an influence on how things are done. All metrics are stored in a data warehouse, and you get access to your data via analytics dashboards.
WHAT IS CRYPTO MARKET MAKING?
Crypto market making means providing liquidity of digital assets to buyers and sellers (investors) on centralized exchanges or decentralized trading platforms. Firms or individuals running such services are called market makers.
Everything starts when a cryptocurrency project gets listed on one or more exchanges. The token markets get launched, and investors may start buying and selling the asset.
What happens, if market makers are not present?
- very little activity in the markets
- spreads (the difference between the best bid and ask prices) are usually quite large, with a couple of percents
- when an investor tries buying or selling some of the tokens, it can lead to significant price swings.
The above problems might discourage traders from trading such an asset. That is why well-managed cryptocurrency projects reserve some budget to hire one or more market making companies, to take care of the token’s markets on cryptocurrency trading platforms.
Market making positively impacts your markets by:
- deepening the liquidity on your token’s books and making them more stable – which helps mitigate the price fluctuations
- lowering spreads between bids and asks so that the prices get fairer for investors; it reduces the cost of entering and exiting positions – which encourages investors to stay on the exchange and trade these assets
In the 24/7 cryptocurrency markets, well-managed assets are supported by algorithmic market makers. They provide liquidity through their market-making services, supported by fully automated software algorithms. Empirica’s liquidity products are reputable top-notch algorithmic market making solutions.
EMPIRICA’S LIQUIDITY ENGINE & ANALYTICS
You would like to increase demand not only for most liquid markets. The solutions will help you assure healthy books and fair prices with tight spreads on markets that are key for your exchange or token. Improving the liquidity depth and trading conditions for investors helps build the so-called organic liquidity.
You are searching for a solid & experienced partner to help you manage your liquidity. 12 years of experience in the traditional markets and crypto space, helping professional market makers, stock & digital asset exchanges worldwide.
We specialize in less-liquid markets, often neglected by other market-makers. Always happy to discuss your KPIs.
We are a tech-first company – our high-frequency trading (HFT) software has been used by many well-established market-makers globally, since 2010.
Access to real-time liquidity analytics for your crypto exchange or token. We set up dashboards to monitor the liquidity of your markets. Market data and trading activities are continuously recorded into a data warehouse, calculating liquidity metrics for the dashboards. You get insights into your market liquidity and the liquidity of your competition.
We help you set up & manage the inventory for your markets.
We help you manage the risk. Hedge on other venues. Possible setup of hedging on custom or exchange-traded indices.
MARKET MAKING OPERATIONS ON CENTRALIZED EXCHANGES VS DECENTRALIZED EXCHANGES
Most digital asset exchanges are centralized and use a business model similar to traditional institutions like the New York Stock Exchange or NASDAQ. They are intermediary platforms connecting buyers and sellers. A centralized exchange operates as a trustworthy broker in deals and serves as a custodian, keeping and safeguarding your digital assets.
Cryptocurrency market makers, as traditional market makers in the financial markets, connect their trading systems to centralized trading venues to automatically send bid and ask orders to the limit order books.
As decentralized finance (DeFi) is gaining more and more importance, market makers start supporting liquidity to decentralized exchanges. Based on a different concept, DEXes use a deterministic pricing algorithm called an automated market maker, which utilizes pools of tokens locked in smart contracts called liquidity pools. Digital assets are usually listed on multiple exchanges. When the price of a crypto asset in the liquidity pool of a given DEX deviates from the global market price, arbitrageurs will come in and push the price back to the global market price.
Market makers on DEXes provide liquidity to the liquidity pools. The protocol provides liquidity providers with a percentage of the fees for transactions performed by pools.
Very often market makers manage the liquidity of a token asset on various CEXes and DEXes at the same time. In such cases, they maintain price parity across different venues.
SCOPE OF MARKET MAKERS’ COMMITMENT
Reputable market makers will promise to make the markets efficient by managing narrow spreads and deep market liquidity. The role of a token project or exchange is to do a good job on the marketing side to encourage their communities to trade the assets. When both sides do their duties well, digital assets will have healthy growth on the cryptocurrency platforms.
A market maker should commit the high availability of their services. Of course in ideal world market makers should be quoting 100% of the time. Unfortunately, there are obstacles like market volatility and connectivity issues (often happening during high market volatility), which make 100%-uptime not possible. A good algorithmic liquidity provider should commit to 90%+ uptime. Also in the time of high volatility market makers may need to widen the spreads to manage their exposure to losses.
Cryptocurrency market makers often extend their liquidity services by introducing projects to exchanges and helping them negotiate listing deals. Listings on well-established cryptocurrency venues might be very hard, if not impossible, for startup cryptocurrency projects. Top-tier digital asset platforms require a proven track record (of high trading volumes) on other exchanges, so it is of high importance to build a proper strategy for token listings. Usually, new cryptocurrency projects first start listing their tokens on mid-size venues and building healthy growth there.
As cryptocurrency exchanges operate 24/7, the markets operated by the liquidity provider will operate around the clock. That is why today the crypto market liquidity is managed by fully automated market makers. Markets are continuously being monitored and traders react to alarms generated by the trading systems. A good market making firm is tracking its own trading activity 24/7 and can report on it with 100% accuracy.
Cryptocurrency projects should avoid crypto trading companies, calling themselves “market makers”, who offer questionable trading algorithms and commit to KPIs like guaranteed daily volumes (by using wash trading strategies), or guaranteed token price growth. The idea behind this is that these activities should draw the attention of new investors, by presenting high ranks on portals like CoinMarketCap or CoinGecko, without really building much value for the community. Such unethical services are short-term and can lead to a bad reputation for a project.
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CHALLENGES OF THE MARKET MAKERS / LIQUIDITY PROVIDERS
In today’s crypto space liquidity provision business leaves little room for second best in technology and infrastructure, not to mention usage of retail market making bots. To be profitable, crypto market makers must operate a predictable, reliable, low-latency trading environment. The system needs to be as fast as the fastest traders on the venue they are providing liquidity on.
Best-in-class tools are needed to provide visibility, optimization, troubleshooting, data capture, and reporting of all electronic activity related to the business of market makers. Traditionally, established liquidity providers on financial markets have built their own systems or sophisticated market making bots in-house to maximize competitive advantage. But those bots with time come to their own technical limits.
The cost of developing and maintaining the software is prohibitive as the business expands to more markets and tokens and the limits of homegrown technologies (market making bots) are met. We have seen that many times as we are in trading software development business for over 10 years, assisting our customers with technological challenges.
It is critical for a cryptocurrency market maker to develop highly optimized algorithms for price analysis and quoting.
CONNECTIVITY TO MAINSTREAM AND NICHE CRYPTO EXCHANGES
Token projects partnering with Empirica have impact on the development team’s roadmap for the next venues we connect. Our partners can also request building a connector to any other OTC broker or crypto liquidity provider.
IS HAVING A MARKET MAKING BOT ENOUGH FOR PROFESSIONAL OPERATIONS?
Providing liquidity is a constant process where your capital is always at risk. Therefore it is all about stability, performance, precision, and adoption to changing conditions and evolving exchanges’ APIs. To not be gamed by other market participants, you need to use software built on architecture that addresses these requirements, otherwise, you will lose with those who do. Most crypto trading bots are doing fine with some simpler alpha or execution strategies. But for efficient and profitable liquidity provision, usage of a retail market making bot may be not enough.
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 financial or digital asset 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?
A new digital asset exchange or an exchange with low liquidity needs market makers to attract other traders. 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.
WHY DO TOKEN PROJECTS NEED A MARKET MAKER?
Good token projects, from day one of launching their markets on a centralized or decentralized platform, encourage their community to trade their token. To prevent low liquidity on their digital assets, they use one or more market makers (the best projects have 3 to 4 market makers).
WHAT IS ORGANIC VOLUME?
It is a real volume generated by executing transactions between 2 traders on a cryptocurrency exchange. A market maker of a reputable token project will encourage generating organic volume by providing liquidity depth and creating fair prices for the traders.
WHAT IS FAKE VOLUME?
The opposite term to organic volume is fake volume, generated by one party by self-trading. To execute trades by using such a technique is market manipulation. Some exchanges and token projects still fake their trading volume in order to quickly increase their position on the volume-based rankings on platforms like CoinMarketCap or CoinGecko. However, it is a very short-term strategy with a negative impact on the company’s reputation. A well-respected market maker will not commit to generating fake volumes.
WHO IS AN ALGORITHMIC MARKET MAKER?
Algorithmic market makers provide liquidity through their market-making services, supported by fully automated software algorithms.
WHAT ARE AUTOMATED MARKET MAKERS
Automated market makers (AMMs) are tools used in decentralized exchanges, that utilize so-called liquidity pools, which store coins or tokens that are locked in a smart contract. Liquidity pools are used to facilitate trades between those assets. Instead of a traditional market of buyers and sellers, a liquidity pool is a counterparty for the trades.
HOW DO MARKET MAKERS MAKE MONEY?
A market maker makes money 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, they are sometimes 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 trading algos they use may be even more profitable.
WHAT IS A MARKET MAKING ALGORITHM?
Market making algorithm 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 ALGORITHM WORK?
The market making algorithms constantly quotes buy and sell orders on both sides of the order book with a defined bid ask spread. 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 professional traders will.
- It has to be fully automated.
- It has to minimize the risk of adverse price movement.
WHAT IS A SLIPPAGE?
Slippage refers to the difference between the mid-market price of an asset and the price at which the trade was executed. The slippage percentage shows how much the price for a specific asset has moved after the trade.
WHAT ARE ORDER BOOKS?
Order books are automated lists that organize buy and sell orders for a specific asset based on its current price level. The purpose of order books is to show the standing orders in different markets in real-time.