To make the market, or not to make the market that is the question
In practically every exchange of any type of assets, there will be traders calling themselves ‘market makers’. What these types of traders, often using bots to manage all their positions, exactly do and what their intentions are a mystery for most. Due to the fact that people don’t understand the motivations of this type of trader, market makers are often associated with ‘malevolent’ practices as price manipulation, wash trading and pump and dumps schemes.
It could very well be true that some market makers are responsible for unethical practices. However, the type of market making discussed in this blog has as its sole purpose to lower the bid/ask spread of an asset. Market making with other goals (or trading strategies as they are called) are not discussed.
In more technical terms; in this blog, we are only discussing market makers that make a profit on the difference in the bid and ask spread they offer to the market. This means that if this type of market maker sells GET for ETH they will immediately take an opposing buy position to acquire GET back (but for a lower price than they sold for). The result of this type of trading is a reduction of the bid/ask spread making the market more liquid.
Why is this relevant for GET again?
What does this have to do with GET? We’ll get into that in a bit. First, let me explain the spread-reducing market maker in more detail. If you are not interested in the nuts and bolts, just scroll down to the section in the tail end of this blog titled ‘Conclusions’.
Market making is everywhere!
Market making is a practice that occurs in all traded assets, in forex markets and commodity markets. The practice of market making is as old as the stock market and isn’t in any way illegal or ‘bad’ for a market as sometimes is posed. If anything market makers generally make a market more liquid and prices more stable. It is important to mention that anybody could take up a role as market maker, a market maker does not need to have the permission of a project (or exchange) to start market making on an asset. After all, they are just placing buy and sell orders as any other trader (although market makers generally do so with bots).
In crypto, however, market makers carry significantly more risk than market makers in traditional markets. Market makers are always willing to buy and sell an asset. They make the market. As such, in crypto, they carry the risk of holding lots of volatile assets as BTC, ETH, or a token itself. As the fundamental value of these assets in this space is significantly harder to pin down the capital risk these traders take by always buying and selling a volatile asset is significantly higher than in traditional markets. In most cases the risk for market making in crypto is so high that it doesn’t make economical sense for them to market make a certain spread.
Providing trade inventory
Due to this high risk coming with the volatile crypto markets; market makers in crypto often trade on request by a project. In these cases(so when the market making is on request), the market makers require that the projects provide the trading inventory to conduct both the buying and selling. This basically means that the market makers do not bear any risk when trading. After all the funds they buy and sell with are not their own, so losing doesn’t effect them. The fact these traders carry no risk might seem a bit weird, but as the crypto markets are so unpredictable and uncertain, traditional market making doesn’t make economical sense from a risk perspective. Projects do benefit of a small trading spread as the liquidity will allow more new people to get involved in the project. As such, they bare the trading inventory risk by providing their tokens and funds to the market maker.
Spread reduction is needed for community growth
Over the last months we have used several market making services to perform spread reduction on our pairs. As explained above we have provided these market makers with trading inventory of the GET Protocol. With this inventory these market makers would buy and sell GET — just below and above the market price. Creating liquidity and (relative) stability of the price. To restate; market makers do not care about how high (or low) an asset is priced; the only care about the bid/ask spread. Regardless of the price these traders will always buy or sell GET just below or above the last traded price.
Market makers do not set the price of an asset, they merely ensure that the bid/ask-spread around this price is tight.
Our motivations for providing these market makers with inventory is simple; we want to ensure people that want to get involved in our project to be able to buy GET without having to buy into relatively high priced sell orders. On the flip side we also don’t want GET holders exiting their position to to forced to sell their GET for a huge discount due to the lack of buy orders close to the average market price of GET.
Attracting traders; market making as a means to an end
The end goal of every project should to not have to rely solely on self-funded inventory market making for a liquid order book. For a healthy and sustainable liquid situation to emerge the asset will need a sufficient amount of day traders trading on the price in tight spreads. This poses a chicken and egg problem. Traders won’t come when the spread is huge and the spread won’t reduce without traders.. That is where the services of a market maker come in.
In order to attract day traders the asset will first have to have a base-level of liquidity — otherwise day traders will have no guarantee they can re-enter or exit the market after they made their trade. The diagram below visualizes the market depth before, with a market maker and finally a ideal ‘after’ situation. Setting up market makers can solve the chicken and egg problem by attracting traders by reducing the spread. Ideally other market makers will come that trade on their own inventory and thus risk.
Now we have the reasons and motivations for market making (with our own inventory) out of the way; lets get into the latest developments in this area.
Fundamental value is now demonstrated
Having a low bid/ask spread is not the only way to attract day traders. One very important factor that traders take into account when acquiring a position in a certain asset is if there is a certain price level that they confidently establish on being solid or ‘the floor’.
About a week ago the GET Protocol has conducted its first buy-back. Clearly demonstrating that the GET token has a clear utility and a base value of €0.50 (0.002577 ETH/GET at today's ETH price) that is being upheld by the protocol and the FIAT coming into the protocol. The buy-back was a clear demonstration of setting of a price floor and with more coming up (at price floor levels that can only be higher; the fundamentals are set).
TLDR — What is going to change:
The first buy-back was a clear demonstration of fundamental value of GET. Moving forward we will continue to conduct buy-backs of GET. In 2019 alone are certain to buy-back GET for at least 1 million tickets. The GET for these events will all be bought back for at least €0.50/GET OR MORE. As all GET bought back will not return to the circulating supply. Economic theory on supply, demand and price tells us that it is far more likely the auction mechanism will start buying back GET for more than just upholding the €0.50/GET floor.
Increased GET demand fueled by use of GUTS Tickets and adoption of foreign ticketing companies will only increase the demand for GET. Dreasing GET in circulating supply and strengthening the GET token economy.
No more self created arbitrage
Previously we instructed our market makers trading with our inventory to follow the market price and provide a tight spread regardless of the price of GET. As of this week we have instructed them to stop doing this. After all; if we are buying back GET for €0.50 or more for our event cycles — it would make no sense for us to simultaneously allow the MM to sell the GET of our own inventory* for less than €0.50/GET. This would simply be irrational as our own buy-backs would create arbitrage through the market makers sub €0.50 sell orders and cut into our own trading inventory (managed by the market maker).
*As explained; if a market maker sells GET they will immediately use the ETH (for example) to buy back the GET for a slightly lower price. The market makers using our inventory solely have the goal to reduce the spread; not accumulate ETH, BTC or GET. The GET Protocol isn’t earning money/crypto on market making.
Conclusions
- Due to the continuous streams of buy-backs planned in 2018 and 2019 that will all be buying GET for €0.50 and up — the market makers trading with trading inventory provided by the GET Protocol Foundation are instructed not sell GET for below €0.50 / GET. As this would mean we would be creating arbitrage ourselves.
- This means that there will be significantly less GET for sale under €0.50 / GET moving forward. This change could result in a drop of volume as there will be less GET for sale on the markets.
- If this decision results in a drop of trading volume this should not be interpreted as negative — it merely means that the open market is not willing to sell GET below the buy-back level (which could be due to the price floor that is set). This blog is merely a notice as we want to be as transparent to our community as possible.
- The market making situation we are describing is not unique. Most projects have used (or are using) a market maker to provide liquidity.
If you have any questions about market making, this decision or anything else. Shoot us a question below or fire away in our public Telegram channel!
More about the GET Protocol
Any questions or want to know more about what we do? Join our active Telegram community for any questions you might have, read our whitepaper, visit the website, join the discussion on the GET Protocol Reddit. Or get yourself a smart event ticket in our sandbox environment. Download the GUTS Tickets app on IOS or Android.
