What is Automated Market-Making?

Crypto exchanges play a central role in the digital asset ecosystem, providing platforms for traders to buy and sell various cryptocurrencies. In addition to buying/selling tools, exchanges offer a range of services tailored specifically to institutional clients. These include OTC trading desks, custody, API access, token listing (e.g., WhiteBIT crypto exchange listing), market-making programs, etc. This article explains crypto market-making services and tools.

What is a Crypto Market Maker?

Market makers in the crypto market are individuals or firms that facilitate trading by providing both buy and sell orders at all times. They aim to create a liquid market, allowing traders to enter and exit positions quickly without significant price changes. This process involves continuously adjusting bid (buy) and ask (sell) prices to maintain balance. By doing so, market makers ensure that there is always a counterparty available for any trade.

A market maker trading platform may incentivize users to become market makers in the following ways:

• Reduced fees
• Rebates
• Tiered fee structures
• Access to premium features
• Colocation
• etc.

What is Algorithmic Crypto Trading?

Algorithmic trading is a popular approach for market makers, leveraging computers’ speed and computational resources. It involves developing a set of rules or algorithms to determine the best time to buy or sell a particular security. These rules are then automated to execute trades based on specific criteria. The algorithm can rely on various technical indicators, such as trading volume, moving averages, or other factors. To use it effectively, traders need high-quality market data, powerful trading platforms, and a deep understanding of market dynamics.

Benefits of Algorithmic Crypto Trading in Market-Making

Algorithmic trading has many benefits:

• Speed and Efficiency: Automated trading algorithms enable fast buying and selling of tokens, providing a significant advantage compared to manual trading. It is especially crucial for market makers, who require quick responses to market changes and client orders.
• Minimizing Risks: It is possible for market makers to maintain the appropriate amount of tokens at any given time. It helps mitigate the risk of being stuck with excess assets during a market decline or an assets shortage during a market rally.
• Higher Liquidity: By continuously placing buy and sell orders, algorithmic trading contributes to higher liquidity, making it easier for other market participants to execute their trades at desired prices.
• Tighter Spreads: Algorithmic market makers can offer tighter bid-ask spreads, which benefits the overall market health. Tighter spreads mean lower trading costs for market participants.

Algorithmic crypto market-making can be a powerful tool for traders and investors looking to navigate the world of digital assets. However, it requires a deep understanding of the underlying technology, market dynamics, and risk management principles.