What is a market maker?

Who’s on the other side when you want to trade without waiting? Often, a market maker. Think of a currency exchange office: it has one price at which it buys euros and a different one at which it sells them. Likewise, a market maker keeps quotes on both sides, usually with software that updates them constantly.

In a hypothetical example, it may offer to buy a token at €9.98 and sell it at €10.02. The difference is called the spread. If both trades are executed for the same quantity, the difference is gross revenue, before fees and other costs. It’s not guaranteed profit: if it buys the token and the price crashes before it sells, it can lose money.

Its orders appear in the order book. The market maker adjusts prices and quantities depending on conditions and the crypto inventory it holds. It may be a specialized firm or another professional participant, not necessarily the exchange itself.

Why it matters

Market makers can increase liquidity, meaning the ability to trade without big price changes. Competition among them often narrows the spread and slippage, the difference between the expected price and the execution price.

We find their role useful, but not proof of a token’s quality. A market can have a market maker and still be shallow or risky. On some decentralized exchanges, instead of such orders there’s an automated market maker (AMM), which calculates prices using rules and liquidity pools.

What to watch out for

The “maker” label in an exchange’s fees doesn’t mean you’re a professional market maker. It describes an order that adds liquidity to the book instead of executing immediately against an existing order.

Also, providing liquidity doesn’t mean supporting the price. Quotes can change or be pulled, especially in turbulent times. And legitimate market making shouldn’t be confused with wash trading or deceptive orders intended to manipulate the market.