Important role of market makers for cryptocurrencies
Cryptocurrency markets are extremely young in comparison to the older financial brothers. The role of market makers and arbitrage funds will be super important to establish a reliable and efficient market mechanisms.
Illiquidity, transactional inefficiency, difference in prices and changing spreads are signs of a new markets that can be seen in some cryptocurrencies. Trust and reputation related to different exchanges is only one factor influencing market development. Presence of designated or non-designated market makers could help with:
a) Providing Liquidity
Movements of currency pairs are measured in the order of low decimal places. Such small moves require a lot of capital to turn into reasonable profits. Many traders cannot afford these amounts, which are necessary to provide enough liquidity for the markets to move. The role of market makers is to bridge this liquidity gap and make trading accessible to retail traders.
b) Matching Orders
The ordering process in trading is a zero-sum game. This means that buyers are matched to sellers and vice versa. The market maker searches the market for buyers and sellers of a currency pair at a particular volume, then matches a buy order on a currency of a particular volume to a sell order on the same currency with the same volume. However, there are occasions when it may be difficult to get an exact match for the trader’s order. This is where market makers can step in to act as a buy or seller of last resort. In other words, market makers “make the market happen”, thus eliminating any delays that traders may have in order fulfillment.
c) Stabilizing Spreads
Without the influence of market makers to stabilize spreads through the maintenance of liquidity, it would be difficult for spreads to be kept low and fixed. However, since market makers assume this exposure and then fix prices for the traders, spreads are kept low and fixed, thus resulting in cost savings for retail traders when executing trades. Furthermore, this also provides better entry points for retail traders.