What Is a Market Maker?
A market maker is a firm or an individual who is willing to buy or sell large amounts of cryptocurrencies on an exchange at a specified price.
The market maker provides a service that involves creating a healthy market for other individuals to buy or sell. By placing copious amounts of buy and sell orders on the order book at specific prices, they tighten the bid-ask spread, which is the amount that the ask price exceeds the bid price on an exchange.
Without this service, a newly released cryptocurrency or exchange may suffer from low trading volume and low liquidity. An exchange may also have high bid-ask spreads where there is a huge disparity between buying and selling prices.
A market maker is also known as a liquidity provider and is usually hired by an exchange to provide this service.
A Deeper Look at This Term
As mentioned previously, a market maker creates a healthy trading market by ensuring a tight spread for a particular coin or token. Tighter spreads mean higher trading volumes and higher liquidity. This means that individuals using an exchange do not have to wait long to complete buy or sell trades.
This service is essential since the cryptocurrency industry is still relatively young, and some coins can suffer from low liquidity and high volatility. Without significant amounts of buy and sell orders, prices can differ widely across different exchanges. This price discrepancy in prices can turn away traders from the market.
For example, a volatile coin with a high spread can jump from $1 one day to $10 the next. This type of price manipulation is common with cryptocurrencies with low volumes. Market makers solve this problem by populating the buy and sell orders in the order book with predetermined prices.
While exchanges typically pay market makers, they can also profit from the buys and sells they generate.
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