Who are the cryptocurrency market makers?

2 months ago

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- This post has been written by HedgeTech

HedgeTech is an algorithmic crypto market maker for digital assets worldwide, with offices in Boston and Singapore. HedgeTech acts as designated market makers for token issuers and cryptocurrency exchanges. It also acts as technology providers for other market makers and broker-dealers.*GDwzYbeziIa3dL_hk6uYow.jpeg

As the cryptocurrency industry evolves, market makers are continuing to play a pertinent role on the markets. Crypto traders are no longer being fooled by unreliable metrics such as daily traded volume — often manipulated — and data reporting sites such as CoinGecko and Coinmarketcap now display more relevant numbers having to do with spread and liquidity — harder to fake. As a result, exchanges seek true orderbook depth and have developed many strategies to get market makers on board.

On the one hand, platforms incentivize traders and institutions to place maker orders by lowering the trading fees or sometimes offering rewards to market makers like HitBTC does with its “market making contracts”. Most of the market makers that fall under this category are profit driven market makers (PDMM).

On the other hand, and in addition to the aforementioned, exchanges such as Liquid require token issuers to have at least one designated market maker, sometimes even more, like Binance asking for 3 as a prerequisite to listing. Such market makers are called designated market makers (DMM).

PDMM and DMM differ in a number of ways, the most important one being their main motive. In this article, we will explore both types of market making and analyze who they serve.

Table 1. Key differences between Profit Driven and Designated Market Makers.*oJnUjKyyCVuJBBkEL_2WGg.png


Profit Driven Market Makers

PDMM are either individuals or institutions who seek to profit from a market making strategy and typically trade with their own capital. Simply put, PDMM will place a maker order on one side of the market and flip it to the other side when that order got filled. For every pair of orders being filled, PDMM will pocket net profits.

Profits per pair of order = average volume of the orders of the pair x difference in price between the two orders of the pair

The levels at which PDMM’s orders are placed depend on the behavior of the market.

In a sideways (stable fluctuations) pattern, PDMM will usually place their orders within the existing orderbook spread in price.

Figure 1. Example of a PDMM strategy on a market with sideways fluctuations*TpblWTlxnGAkRo28ZJa-tA.jpeg

In a trendy pattern, say downtrend, a PDMM sell order will only attempt to be the best sell orders (i.e. at the lowest price possible) but their buy order will not be the best buy order so that they can ride the trend.

Figure 2. Example of a PDMM strategy on a market with downtrend*KEWijCHwuTJ6qe0zxSAsng.jpeg

Regardless of the behavior of the market, two key factors impact how profitable PDMM are.

Overall profits = average difference in price between the two orders of pairs x average filling frequency for pairs of orders

The first important factor is the difference in price between orders in each pair of order, the larger the better. The difference in price determines the profits per pair of transaction. As a result, PDMM will enter a market voluntarily after carefully analyzing which markets offer the best spread opportunities.

The second factor playing a role in the profits generated is the frequency at which orders are filled, the higher the better. Indeed, a high frequency will result in a great number of pairs of orders being filled and thus more transactions to profit from. As a result, PDMM look for markets that are already actively traded.

Although PDMM place maker orders — thus contributing a bit to the market depth — and that such orders participate in closing the orderbook spread — especially when several PDMM compete — their main objective is to realize profits, not to improve market efficiency. Hence, PDMM are suitable for high net worth individuals or institutions willing to get their assets managed for profits.

In the digital assets industry, PDMM are typically crypto traders and private asset management funds. Finding PDMM that openly advertise as such is harder in such a young industry. That said, Cryptohopper for example is a software company that provides market making strategies, among others, destined to realize profits. If we had to draw a parallel with the older traditional markets, Jane Street for instance is known to use market making strategies, especially on ETFs, to generate significant returns for their investors.


Designated Market Makers

DMM are institutions who are committed to improving markets efficiency and typically trade with their clients’ capital. The method used is quite unique in that DMM maintain orders on both the buy and the sell side at all times and in a systematic fashion. In other words, when an order is filled, say on the buy side, the DMM will immediately replace that order with an order of the sell side at the best price possible (i.e. the lowest price on the sell side).

In doing so, DMM maintain two key factors that impact all the other traders in the market.

First, DMM have the obligation to narrow the order book spread — i.e. the difference in price between the best buy and best sell. This guarantees that traders face the best price possible at all times.

Second, DMM ensure that the order book is filled with orders at different price levels — to allow the price to move according to supply and demand — and in a dense way — i.e. orders are close to one another. As a result, all other traders can simply take the DMM maker orders to enter or exit the market whenever they decide to do so, instantaneously. This second key factor is called market liquidity — or depth -, it guarantees that traders can trade at fair prices — close to market price — in combination with spread, and in desired quantities — i.e. with little to no slippage.

Combining both a narrow spread and a high liquidity additionally makes a market less volatile in price execution, yet not compromising price movement.

Figure 3. Without DMM: low liquidity, low density of orders, fragile spread; high slippage, high volatility, low efficiency.*ADa7peOogT-UWaOYV7pnMw.png

Figure 4. With DMM: high liquidity, high density of orders, narrow spread; low slippage, low volatility, high efficiency.*2gRBY4zb4UO0toMz69SN5A.png

It seems that DMM are hired to trade on less liquid markets.

Although DMM are committed to improving market efficiency, it does not mean that they do not make profits on their clients’ behalf. DMM strategies are designed in a way that ensures no losses to trading fees and profits when the price fluctuates, much like PDMM strategies on sideways markets. On top of that, DMM can also hedge their clients’ risk fully when on trendy market environments using orderbook replication strategies or derivatives products when available. Hence DMM are suitable for token issuers and exchanges willing to further improve their markets and better position themselves in a hyper competitive industry.

In crypto, DMM typically communicate more openly about their operations. Such institutions include GSR or HedgeTech for instance (for a more exhaustive list, you can refer to this article). This type of market making exists in traditional markets too as Johannes A Skjeltorp analyzed in his reseach paper .


Both PDMM and DMM are valuable participants of the crypto markets, much like any other market. That said, they serve two different purposes. On the one hand, PDMM work towards profitability and are hired to do so in their clients’ interests only. On the other hand, DMM work towards market efficiency for their clients’ markets. They are the last link of a long chain that went from blockchain to smart contracts, wallets, exchanges and finally orderbook to provide traders with the best environment possible.

HedgeTech is an algorithmic crypto market maker for digital assets worldwide, with offices in Boston and Singapore. Contact:


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Published 2 months ago