In this article, we explain what Market Making is and how it works.

What is Market Making?#

Why would you want to use it? There are three main reasons:

1. You’re a trader and would like to profit from a big spread.
2. Your currency doesn’t have enough liquidity and your spread is too big.
3. You’re a starting exchange and need liquidity.

The Market Maker bot provides liquidity to a market of your choice and can act as a way to profit from a big spread. The spread is the difference between the highest bid and the lowest ask. The highest bid is the highest someone is willing to offer, while the lowest ask is the lowest price someone is willing to sell his assets for. Illiquid markets have big spreads. Market makers are the ones that place orders around the spread to profit from it. This reduces the spread and creates liquidity.

Illiquid assets may be hard to sell quickly. There is low trading activity or interest in the issue. This indicates a lack of ready and willing investors to purchase or sell the asset. As a result, illiquid assets tend to have lower trading volume.

The definition of a market-maker: "A market maker must commit to continuously quoting prices at which it will buy (or bid for) and sell (or ask for) assets. Market makers must also quote the volume in which they're willing to trade, and the frequency of time it will quote at the Best Bid and Best Offer (BBO) prices.

Market makers must stick to these parameters at all times, during all market outlooks. When markets become erratic or volatile, market makers must remain disciplined in order to continue facilitating smooth transactions.

How does Market Making work?#

With the Market Maker bot, you place layered limit buy and sell orders and keep the market liquid. By placing these orders, the order book of the exchange will change. The change makes the spread smaller. Reduces the spread and makes the market more liquid.

When you set up a Market Maker bot, you need funds in your quote currency and in the currency for which you want to make the market. Your Market Maker will place orders “around” the spread, depending on your configuration.

Markets change fast, so you need to be able to change your order price fast.