Learn how we do market making for our partners and what is important to succeed
See some general questions and answers on liquidity provision on cryptocurrency markets
If you represent crypto exchange, please see this page
Author: Michal Rozanski, updated on 12 January 2023
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.
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 firms, to take care of the token’s markets on cryptocurrency trading platforms.
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.
When we talk with token projects we often hear they usually face a few challenges:
We encountered many token projects that faced similar problems, which blocked their development potential. In order to attract investors to the project and build a community around it, the token must overcome these problems. Here’s how we help tokens address the above challenges.
For over 50 tokens on several exchanges Empirica makes 40-60% of the turnover, quoting them 99% of the time. On exchanges for which we are the designated market maker, we are responsible for the execution of 20-30% of the exchange’s daily volume. Hundreds of millions of usd monthly volume we generate for our partners. With Empirica you can expect the increased demand for your token in your community, healthy order books and a fair price quoted with low spread regardless of market conditions.
We specialize in building liquidity for small and medium token projects, often neglected by other market making companies. During the last years, we have crafted and optimized our algorithms solely for that purpose
Unlike many other market makers in crypto, we do not demand 3-5% of your token supply for our activities and call options. We are flexible in choosing a business model that will work for you (retainer, call option, hybrid).
We extend our liquidity services by introducing projects to exchanges and helping them negotiate listing deals. Listings on well-established cryptocurrency venues might be very hard, especailly 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. More on how we help in token listings can be found here.
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.
Our software has worked on the markets since 2012, first on the highly competitive major stock exchanges and derivatives markets, later we expanded to crypto markets. We are engineers, we have built high-frequency trading (HFT) systems and data analytics in our DNA.
We help you set up and manage the inventory for your markets.
The liquidity provision firm managed by the founders of Empirica is an exceptional partner, their top-notch solutions have become critical for our liquidity ambitions.
Algorithms by Empirica provide liquidity to our order books 24/7 and are resilient to market volatility. We know we can count on them when it comes to liquidity support.
We’ve been honestly impressed by the level of knowledge on markets and technology at the same time by the employees of Empirica. I can recommend these specialists to any exchange, trading- or token project that needs support in their markets. (May 2022)
Our solution is integrated with all major and many local digital asset exchanges. Both centralized and decentralized. The list of connectors built, maintained, and updated with every change in API is growing and includes crypto exchanges like Coinbase, Binance, Kraken, Bitfinex, crypto.com, Bequant, HitBTC, Bittrex, Bitpanda, Gate.io, and many others.
Token projects partnering with Empirica impact the development team’s roadmap for the next venues we connect.
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 market making software built on an architecture that addresses these requirements. Otherwise, you will lose to those who do. Most crypto trading bots are doing fine with simpler alpha or execution strategies. But for efficient and profitable liquidity provision, using a retail crypto market making bot may not be enough.
Market makers in crypto are typically investment firms, usually proprietary trading firms (meaning they use their capital), and less often hedge funds, using algorithmic trading techniques to create market liquidity. They quote both sides of the market continuously to meet the demand and supply of investors. By quoting large order sizes with tight spreads, they lower the costs of transactions in digital assets for other market participants.
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.
From day one of launching their markets on a centralized or decentralized platform, good token projects encourage their community to trade their token. To prevent low liquidity on their digital assets, they use one or more crypto market making services (the best projects have 3 to 4 market makers).
The volume generated by executing transactions between traders on a cryptocurrency exchange is called organic volume. A market maker will help to grow organic volume by providing liquidity depth and maintaining fair prices for the traders.
The opposite of organic volume is fake or wash-traded volume generated by one party by self-trading. Executing trades by using such a technique is market manipulation. Some exchanges and token projects still fake their trading volume to quickly increase their position on the volume-based rankings on platforms like CoinMarketCap or CoinGecko. However, that short-term strategy negatively impacts the company’s reputation. Projects should avoid companies offering market making services that commit to KPIs like guaranteed daily volumes (by using wash trading) or guaranteed token price growth.
An Automated Market Maker is an algorithm used by decentralized exchanges that utilize so-called liquidity pools, which store tokens locked in a smart contract using LP tokens. Liquidity pools facilitate trades between these assets, and the AMM algorithm is used to derive a price of a trading pair based on order size and liquidity pool depth. In this system, traditional order books with orders from buyers and sellers are replaced by liquidity pools which are the counterparty for the trades.
Liquidity mining is a campaign that incentivizes liquidity providers with tokens. Learn the details on liquidity mining here.
A market maker makes money in two ways:
And last but not least, because of lower transactional fees, other trading algorithms they use may be even more profitable.
Many established firms focusing on market making have recently entered the cryptocurrency space. Companies like Jane Street, Virtu Financial, Jump Trading, and even Citadel Securities are among them. These are all enormous businesses with over a thousand employees each, and they all began on Wall Street in the 1990s. They are the biggest firms on Wall Street, but will they also dominate the crypto sphere? It’s not decided yet, as our industry has many impressive native crypto trading firms that used the time very well to develop competitive technology.
Market making strategy is an automated investment algorithm that provides liquidity by filling up the order book with buy and sell orders so that other market participants, buyers and sellers alike, can execute their orders whenever needed. So market maker plays a unique role in the financial ecosystem by building trust in the market.
Here you will learn more about the topic of market making strategy
From a technical point of view, market making is like arbitrage or triangular arbitrage, a high frequency trading (HFT) strategy.
The market making strategies constantly quote 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:
For those feeling hungry for some theoretical background, here is a short list of books on market making.
Order books are automated lists that organize open buy and sell orders for an asset based on their price levels. Order books aim to show open orders in different markets in real-time in a standardized way depicting the current supply and demand situation.
| Size | Bid | Ask | Size |
|---|---|---|---|
| 10 | 20000 | 20100 | 10 |
| 20 | 19950 | 20150 | 40 |
| 100 | 19900 | 20200 | 80 |
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 during the trade. In the example above, if we will buy 50 BTC with a market order, our slippage will be 100 USD from the midpoint value (20050).
In today’s crypto space, the liquidity provision business leaves little room for the second-best in technology and infrastructure, not to mention the usage of retail market making bots. The crypto market maker must operate a predictable, reliable, low-latency trading environment to be profitable. The system needs to be as fast as the fastest traders on the venue they are providing liquidity.
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 making firm. Established liquidity providers have built their systems in-house to maximize competitive advantage. However, the cost of developing and maintaining low-latency software is considerable.
Still, about 80% of the volume in crypto is made on centralized exchanges. CEXes use a model similar to traditional venues like the New York Stock Exchange or NASDAQ. They are intermediary platforms connecting buyers and sellers, combining the role of a custodian and a broker.
Source: The Block, data by Coingecko
As traditional market makers in the stock markets, cryptocurrency market makers connect their trading systems to centralized trading venues to automatically send bid and ask orders to the limit order books.
Based on a different concept, decentralized exchanges 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 market price.
Market makers on DEXes provide liquidity to the liquidity pools. The protocol shares a percentage of the fees for transactions performed in the pools with a liquidity provider.
Market makers in crypto often manage the liquidity of a token asset on CEXes and DEXes simultaneously. In such cases, they maintain price parity across different venues.
Reputable crypto market making firms 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 take care of 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 to the high availability of their services. The target quoting uptime is 100%. There are obstacles to this goal, like market volatility, inventory, and connectivity issues, which make 100%-uptime not possible. A serious algorithmic liquidity provider should commit to 95%+ uptime.
As cryptocurrency exchanges trade 24/7, liquidity providers must operate around the clock. That is why fully automated market makers manage today the crypto market liquidity. Markets are continuously monitored, and traders react to alarms generated by the trading systems.
