In the financial market, there exists a group that is often more powerful than project parties and top VCs, playing a crucial role as dominant investors influencing the market. Why are they so important? Let's find out together!
1. What are market makers?
Market makers (MM) are key players ensuring the liquidity and efficiency of financial markets (especially cryptocurrencies). They are well-funded large investors with extensive experience in trading assets such as tokens, stocks, bonds, forex, and commodities.
The main function of market makers is to provide liquidity to the market by continuously quoting buy and sell assets. They keep the bid-ask spread narrow, create liquidity for trading, and attract more participants. This helps increase the trading volume and profits for market makers.
2. How important are market makers?
Continuous liquidity supply:
Market makers continuously provide various buy and sell orders for assets on exchanges. This helps provide liquidity to the market, enabling traders to buy and sell assets more easily. They actively participate by placing orders that help narrow the bid-ask spread, thereby maintaining market liquidity.
Reducing market volatility:
The continuous buying and selling activities of market makers help absorb market supply and demand fluctuations. This plays a crucial role in controlling and limiting price volatility, especially in the highly liquid cryptocurrency market. When demand suddenly changes, market makers can act as balancers, providing or absorbing necessary supply, thereby reducing price fluctuations.
Ensuring the smooth operation of the market:
The existence and participation of market makers are crucial factors in ensuring the smooth and efficient operation of the market. They help maintain conditions for flexibility and smooth trading, preventing market freezes or stagnation.
3. How do market makers operate?
Market makers act as intermediaries for asset trading, continuously providing various buy and sell prices. Their mechanism is as follows:
Setting buy and sell prices:
The buy price is the price at which the market maker is willing to purchase assets from investors.
The ask price is the price at which the market maker is willing to sell assets to investors.
Matching trading orders:
When investors want to sell assets, they place sell orders at the market maker's buy price. At this point, the market maker matches this sell order with another investor's buy order or buys the asset from the investor at the buy price.
Similarly, when investors want to purchase assets, they place buy orders at the market maker's sell price. At this point, the market maker matches this buy order with another investor's sell order or sells the asset to the investor at the sell price.
Market makers profit from the difference between the buy price (bid price) and the sell price (ask price), known as the 'spread'. They always strive to keep the spread at a reasonable level to attract a high volume of trades and ensure market liquidity.
4. How do market makers profit?
Market makers play a vital role in maintaining the liquidity and efficiency of financial markets. They earn profits from two main sources:
Spread: The spread, which is the price difference between the buy and sell prices, is the traditional source of income for market makers. They provide a buy price slightly lower than the sell price. When investors want to buy assets at the sell price, market makers match this buy order with a sell order placed at a slightly lower buy price. The difference between the buy and sell prices is their profit.
Commission: In addition to spread income, market makers also charge a commission on each transaction. These fees typically apply to large investors executing numerous trades.
The larger the trading volume, the more opportunities market makers have to profit from spreads and trading fees. Therefore, they are motivated to maintain market liquidity and activity. However, to achieve this goal, some market makers may use marketing strategies such as artificially inflating stock prices to create a FOMO effect (fear of missing out) to attract more investors, especially those new to the market.
5. Benefits of collaborating with market makers
Collaborating with reputable and reliable market makers will bring several significant advantages to token issuers. These advantages include:
Increasing liquidity: The continuous liquidity provided by market makers allows investors and founders to more easily buy, sell, or liquidate their positions in the market.
Increasing trading volume: Higher liquidity has the potential to attract more trading interest and demand for tokens due to lower trading costs and reduced market impact. This helps increase token trading volume.
Reducing the risk of price manipulation: With ample liquidity, it becomes more difficult to manipulate the price of tokens as it requires substantial capital to influence prices.
Enhancing project visibility: An increase in token trading volume and the potential for listing on major exchanges brings more attention and discussion to token projects, thereby increasing brand visibility.
Opportunities for listing on major exchanges: Reputable cryptocurrency exchanges often prioritize listing tokens with stable and continuous liquidity from professional market makers.
6. Frequently Asked Questions
Question 1: Do market makers influence market transparency?
Market makers play a crucial role in enhancing market transparency. They improve transparency by publicly displaying market buy and sell prices. This helps build trust and minimizes disputes during the trading process, as investors can clearly observe the current buy and sell prices.
Question 2: Can market makers change asset prices?
Yes, market makers can influence asset prices by adjusting the buy and sell prices. In markets with lower liquidity and limited supply and demand, their influence on prices is usually greater. By adjusting the buy and sell prices, market makers can affect the trading price of assets.
Question 3: How to identify reliable market makers?
Some important characteristics of reliable market makers include:
A long-standing operational history and reputation in the industry.
Providing stable and continuous liquidity to the market.
Possessing a team of experts with extensive experience in the financial sector.
Complying with high regulatory standards and business ethics.
Trusted and chosen by leading exchanges and projects.
Question 4: When should Web3 projects reach out to market makers?
Web3 projects should seek collaboration with market makers at various stages of development:
Before Token Listing: New projects with unlisted tokens can contact market makers for consulting support and to establish connections with major exchanges to increase the chances of successful token listing.
After Token Listing: Projects with listed tokens can collaborate with market makers to provide stable liquidity, expand their token listing across multiple exchanges, and increase token trading volume.
With rich experience and deep industry connections, market makers can effectively support Web3 projects in entering the cryptocurrency market and increasing liquidity.
7. Conclusion
Market makers play a crucial role in maintaining the liquidity and stability of financial markets. By placing buy and sell orders, they facilitate trading readiness, reduce volatility, and ensure reasonable pricing. Understanding this role can not only help individual investors make informed trading decisions but also build a strong market.
Through this article, have you learned about market makers? If not, feel free to leave a comment below, and we will answer you!