David Aktary
May 16, 2018 · 6 min read

TL;DR:

  • Market making is the art and science of profiting from the bid/ask spread by algorithmically managing standing buy and sell orders.
  • Sign up for our Market Maker Program with as little as a $100 USD commitment and enjoy 0% maker fees PLUS get paid a rebate.
  • Refer another market maker to the platform and receive a real-time, trustless commission equal to 10% of the fees they earn.
  • We’ve open-sourced our Automation Toolkit that can be run by anyone with a couple of simple commands. Algorithmic market making is no longer the domain of large institutions!
  • The markets you make will be available to our large and growing network of Aqueduct syndication partners like Melonport, RigoBlock, and Totle.

Standing on the shoulders of giants

As anyone familiar with the crypto markets knows, there is a lot of volatility here. Q1 of 2018 saw a massive decline in prices from the highs of late 2017, which resulted in a lot of traders losing money. However, some institutions that focused on market-neutral strategies did quite well during Q1 2018 because they profited from trader activity in the market, regardless of the direction it was going.

According to Bloomberg:

“Funds specializing in virtual currency market making and arbitrage strategies delivered first-quarter gains even as their mostly bullish peers lost 40 percent on average.”

In this post, we’ll share with you how you can take advantage of a market-neutral strategy called market making that promises the possibility of (relatively) steady returns, and we’ll give you the tools you need to do it yourself so you can profit from market volatility — and incentives — like the big institutions do.

The art and science of making markets

Market making is a trading strategy by which the market maker trader (who we’ll refer to here as the “MM”) places standing buy and sell orders at a carefully calculated spread around the most recent price. Naturally, the MM intends to buy low and sell high, thus “capturing the spread”. This strategy requires a few things:

  • The MM must monitor the price of the asset
  • The MM must calculate the spread (or bands) around the price that will allow buy and sell orders to appropriately compensate for risks and costs
  • When the price moves, particularly when it moves in one direction repeatedly and rapidly, the MM must recalculate the spread and place new orders

The factors that should be considered in the spread calculation can include (but are not limited to):

  • Price volatility
  • Trading costs (transaction fees, gas, etc.)
  • Risk tolerance
  • Profit!

Note that parameters like where these orders should be placed around the market price, how much to place each order for, how long to let the order live, how to react to market movements, and others are the “special sauce” that each MM holds dear. It will be up to you to determine your own strategy for setting these parameters to maximize profitability.

New Market Maker Program

When we launched ERC dEX, we announced our basic fee structure. We then worked to design an incentive structure that lowers barriers to entry for providing liquidity and are now proud to announce our Market Maker Program (“MMP”) to the world. With the MMP, we actually pay you to trade! The program is based on a six-month agreement during which you agree to provide a particular level of liquidity for a token pair for at least 8 hours a day, 7 days a week. You also agree to allow ERC dEX to use your name/logo for promotional purposes. In return, we charge you 0% maker fees and we pay you a rebate based on the following tiers:

Note: the size commitment in each tier is total buy size plus total sell size in a given token pair. 1 bp is 0.01%.

As an approved market maker, you’ll also have access to our Aqueduct Partner Portal, where you’ll be able to see exactly what’s going on with your liquidity, if it’s getting taken on ERC dEX or elsewhere in the Aqueduct network, and determine how much you’re earning in rebates. Register for our MMP today to learn more.

The Aqueduct Partner Portal

Automation Toolkit software

To augment our new MMP, we’re open-sourcing our Automation Toolkit. This easily-configurable software is completely containerized and has a simple, intuitive user interface that allows even the least technically-inclined to quickly configure it and get started capturing spread!

Starting a market and viewing logs

We’ve also set up a Slack channel for market makers to get help, discuss strategy, and talk shop.

Why make a market on ERC dEX?

ERC dEX isn’t just a single, stand-alone trading platform. It’s a network. Through our Aqueduct global shared liquidity network, we’ve partnered with other relayers, institutional traders, and dApps to syndicate your orders far and wide. Since your orders aren’t stuck sitting on a single order book, but free to roam the global shared liquidity pool that Aqueduct is designed to facilitate, it’s much more likely that your orders will get taken and you’ll capture that sweet, sweet spread. Our relayer and dApp partners on the taker side are working hard to get your orders in front of their audience… an audience you wouldn’t otherwise reach on a single venue or stand-alone relay.

While the Aqueduct network is ever growing, some of our notable liquidity syndication partners today include Melonport, Amadeus Relay, Shark Relay, RigoBlock, and Totle.

But wait, there’s more!

Once you’re in the MMP, you can bring your friends in and get paid for their success! We have a referral program that enables you to invite friends and be paid a commission equal to 10% of the rebates they earn. You can learn the details of this program and get your referral code right in your Aqueduct Partner Portal homepage.

A quick, grossly over-simplified example

You join the MMP at Tier 1 (1 bps) and commit $200 of capital with $100 on both sides of the trade. Current ERC dEX spreads on WETH/DAI are around 20 bps, which is fairly high. A standard MM strategy looks like this (with contrived prices to make things easier to reason about):

WETH/DAI sell price: 100.20
WETH/DAI midpoint price: 100
WETH/DAI buy price: 99.80

With every trade executed, you’d profit about 20 cents, excluding rebate. With the rebate, you’d receive about 1 cent in instant rebates. After 20 trades, you’ve equaled your profit margin for a single trade. This adds up in a big way, especially if you’re running an automated strategy with our Automation Toolkit.

Additionally, our referral program allows you to receive a commission equal to 10% of the rebates paid to market makers you refer. If you refer an account that behaves as outlined above, you would receive an instant referral rebate of .1 cent on every trade. While this is small on a per trade basis, imagine referring a market maker that does 1,000,000 USD in daily volume — not uncommon in existing crypto markets. That market maker is in our Tier 3 program (3 bps), meaning you’d make 3 cents for the same trade above, bringing your total daily rebate to 30 dollars — all for simply signing up and sharing a referral link.

Get started now

To get started, just register for the MMP and then follow our market maker guide and you’ll be up and running in no time. Once you are, don’t forget to take advantage of our referral program so you can get paid when your friends trade.

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ERC dEX

Building the most trustworthy platform to trade the next generation of securities.

Thanks to Lindsey Renken, Luke Autry, and John Mattox

David Aktary

Written by

CEO, ERC dEX

ERC dEX

ERC dEX

Building the most trustworthy platform to trade the next generation of securities.

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