A market maker (MM) is a person or firm that provides trading services for investors and traders. These services range from executing limit orders to providing liquidity. Market making is an important component of modern exchanges. It also allows investors to buy and sell at the best price.
There are several types of MMs. These include high-frequency traders, institutional traders and retail liquidity providers. MMs use algorithmic trading techniques to fill order flow. They take a small profit on each trade, but their main job is to self-hedge against losses. During volatile markets, a MM can see its inventory locked on one side or the other.
While the number of trades executed by a MM may seem small, the sheer volume can be staggering. For example, a single order can be made thousands of times, depending on the MM’s volume and the crypto pair in question. The most important thing is to minimize latency. This is the amount of time between the time an investor places a buy or sell order and the time the order is filled. Generally, waiting time lowers volume and increases trading cost.
Compared to traditional market making, crypto assets are much more volatile. In addition, they are often exposed to hacks and exploits. So it’s no surprise that many traders are trying out new trading venues. However, market making is still a viable option for those who have the capital and the grit to do it. MMs that provide basic price functions are a good place to start.
To find the best possible price, a market makermarket-making-in-defi/ must quote the correct offer and bid prices. This is a good way to learn about the difference between a buy and a sell, and it’s one of the most fun aspects of market making. MMs use a specialist process to ensure that all marketable trades are priced accurately and executed on time.
Another notable market making Defi feat is the creation of a dynamic liquidity pool. A liquidity pool is similar to a forex trading account where a group of traders pool their resources in an effort to achieve a better trading rate. Generally, a liquidity pool will need at least two crypto pairs to be profitable.
A well-crafted AMM can be an important financial instrument in the fast-evolving DeFi ecosystem. Automated MMs improve the capabilities of existing decentralized exchanges. Their presence helped make DeFi possible, and they can be expected to play a key role in its long-term success. MMs can be a boon to the decentralized finance industry, and they are a promising sign of the maturing industry.
Having the best possible price for a given security is the main MM’s mission, but that’s not all. MMs must also find the best buyer and seller for the security. This is an arduous task. Using a clever algorithm, a MM can match a buyer’s needs with a seller’s demands. Luckily, these days MMs can be found in both the traditional and crypto space.