Liquidity Providers (LPs) is a broader concept that includes all participants who provide liquidity to the market. These can include:
• Ordinary users on decentralized platforms (in liquidity pools).
• Large investors (institutional players).
• Funds (hedge funds, venture capital funds).
• Market makers.
Market makers are professional market participants (usually companies or funds) who actively create a market by placing opposite buy and sell orders to maintain liquidity and trading stability.
🔎 The difference between market makers and LPs:
• LPs usually provide liquidity passively in pools (e.g., in Uniswap), earning a portion of the fees.
• Market makers actively trade, place and withdraw orders, trying to profit from the spread and price changes.
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🤝 Do they sign a non-disclosure agreement (NDA)?
Yes, market makers on centralized exchanges almost always sign NDAs (Non-Disclosure Agreements).
✅ Why this is important:
• Market makers often gain access to confidential information about the exchange (trading volumes, orders, liquidity flows, APIs, etc.).
• Exchanges may offer market makers special trading conditions (e.g., reduced fees, priority access to new listings).
• Information about a large position or order of a market maker can be used for manipulation if it becomes available to third parties.
🔥 Example:
When a new token is about to be launched on the exchange, market makers may receive advance information about liquidity levels and supply volume to properly adjust their trading strategy. Therefore, exchanges protect themselves through NDAs.
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🎯 How market makers manipulate markets
Market makers are sophisticated players who have vast resources and use algorithmic trading to extract profits. They manipulate the markets in several ways:
1. Spoofing
👉 Placing large buy or sell orders with no intention of executing them.
• For example, the market maker places a large buy order, creating the illusion of high demand to push the price up.
• As soon as the market starts to react, the order is withdrawn, and the market maker sells assets at a higher price.
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2. Pump & Dump
👉 A market maker or a group of market makers coordinate to pump the price of an asset (e.g., through mass purchases), provoking retail traders to join the movement.
• When the price peaks, the market maker sells assets, crashing the price and leaving retail traders with losses.
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3. Stop Hunting
👉 Market makers track liquidity levels and place large orders to trigger stop orders of small traders.
• For example, if the market maker sees that many stop-loss orders to buy BTC are gathered around $40,000, they might push the price down to that level, gather liquidity, and then quickly reverse the market.
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4. Wash Trading
👉 The market maker simultaneously buys and sells assets, creating the illusion of high trading activity and liquidity.
• This attracts other traders to the market and allows the market maker to take advantageous positions before real movements.
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5. Spread Manipulation
👉 Reducing or widening the spread depending on objectives.
• If the market maker wants to raise the price, they narrow the spread to encourage buyers to enter the market more actively.
• If the goal is to lower the price, the spread widens to make it difficult to buy and induce panic.
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🏆 Who stands behind market makers
Market making is conducted by specialized firms with access to large capital and advanced algorithms. Among the largest:
• Jump Trading is one of the largest high-frequency trading firms in the world.
• Citadel Securities controls a significant portion of trading volumes in stock and cryptocurrency markets.
• Jane Street is a well-known algorithmic trader in stock and cryptocurrency markets.
• Alameda Research was the largest market maker in crypto before the FTX collapse.
👉 Often behind market makers are funds, exchanges, and large institutional players who finance market makers to provide liquidity on their platforms.
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💼 Why exchanges need market makers
1. Providing liquidity — without market makers, the market would be less liquid, with high spreads.
2. Price support — at the start of new trading pairs, market makers artificially keep the price within reasonable fluctuations.
3. Combating manipulation — paradoxically, market makers both create and protect the market from chaos.
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🚀 Example of market maker operations in crypto:
1. A new token listing is being prepared on the exchange.
2. The exchange enters into a contract with the market maker to support liquidity.
3. The market maker receives tokens in advance at a fixed price.
4. At the market opening, the market maker places large buy and sell orders to create a narrow spread and smooth out sharp price fluctuations.
5. The market maker receives a share of the fees and the difference between buying and selling as profit.
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🔥 What’s the essence?
👉 Market makers are key players who seemingly provide market stability but can actually manipulate prices to their advantage.
👉 They have direct connections with exchanges, sign non-disclosure agreements, and work with huge capital, using advanced algorithms for manipulation.
👉 Ordinary traders often fall victim to these manipulations, as market makers have information and technical advantages.
So, market makers are essentially whales that control the market from the shadows.
