Who Are Market Makers and How Do They Work?

The global currency market, including the crypto and fiat industries, is tremendously active and brimming with participants worldwide. From large-scale financial institutions, prime brokers, and trading platforms to individual traders, the currency world has always maintained popularity. This vast market contributes significant value to the global economy daily, serving as a pillar to profitable business dealings worldwide.

However, the world’s most significant financial industry would struggle to function smoothly without liquidity providers. These institutions make everything flow on the currency market by providing the necessary liquidity injection and making the seemingly unfeasible deals happen. Today, we will discuss one of the major players in the liquidity provider niche: market makers and their significance in the modern business world. 

Market makers are various financial companies on the broad currency exchange market that supply the industry with much-needed liquidity. 

This means that MMs possess large pools of liquid assets, primarily currencies in some form, which they utilize to purchase and sell various currencies (fiat and crypto) on the market. To an untrained eye, this might not seem like a big deal. Still, with further examination, we will swiftly discover how market makers add an indispensable value to the currency industry.

Imagine a hypothetical currency market with only two participants – a seller and a buyer. These two parties are inherently connected with matching interests. However, their desired prices do not always match up. Sometimes, the seller asks for too much money on the selected currency assets, and the buyer wants to purchase at a considerably lower price. 

With market makers, these two parties could avoid hitting a stalemate. For a seller, currency X might be worth $2, but the buyer might be only willing to provide $1.5 per unit. None of the participants want to eat up all the losses. After all, it’s bad business to shoulder the load in such a dramatic way. 

Enter the market maker, who can purchase the currency X for $1.7 and sell it for $1.8. Now, both market participants have uplifted their potential benefits from the trade. Although they still won’t get the perfect outcome, their options are much more accessible and financially feasible. Unlike the first scenario, the exchange will most probably take place.

The currency market is filled with mini scenarios like this every day. Numerous exchange deals would simply not take place at all without market makers, as the involved parties might not possess the necessary resources to trade at high volumes. With MMs, the price differences between the selling and buying parties become tighter, persuading millions of traders to proceed with a transaction.

One question remains – what do the MMs gain from continuously providing ample financing support to the global currency market? The answer is simple – they reap the spread profits. In the context of MMs, the spread is a difference between the selling and purchasing price set by the market maker. 

From the above example, our market maker has set a selling price of 1.8 and a purchasing price of 1.7. In this case, the MM will receive a $0.1 profit from every currency unit. While this might not seem sizable, most MMs trade in tremendously high volumes and earn significant earnings from their timely liquidity assistance. 

MMs come in many shapes and sizes within the currency industry, each offering unique methods to provide liquidity. Let’s discuss: 

Large banks and other financial companies dictate much of the fiat currency pricing as the most prominent players in the money market. Despite their traditional nature, numerous banks have also engaged in crypto market-making, paving the way for a more accelerated trading environment in the crypto industry. 

Differing from large banks’ traditional and conservative nature, prime brokers actively seek opportunities on the currency market. Their entire strategy is to gather a pool of resources through investors and offer liquidity to the most promising segments.

Prime brokers are known for their excellent money management services and a three-way generation of profits, including market buyers, sellers and the investors who reap rewards for their respective liquidity investments.

It might seem that being an MM is a colossal endeavor that requires a sizable investment just to get the wheels moving. While this is true for industry-dominating MMs, this neat concept can work perfectly on a compact scale. 

Millions of successful individual traders or small firms engage in market-making by targeting a specific niche of the currency market and earning lucrative profits. These smaller-scale industry participants mainly acquire their funding from dedicated LP companies. 

While MMs play a prominent role in every respective industry, they are particularly vital in the crypto landscape. While the fiat industry is relatively stable and has numerous instruments to keep it from imploding, the crypto landscape is far from achieving these levels of sturdiness. It is important to remember – crypto has only been a viable alternative to traditional currency for around a decade. For all respects and purposes, the crypto industry is in its infancy. 

For that reason, the crypto market remains quite volatile as industry participants, lawmakers, and developers are still trying to find their footing. Thus, market makers are essential to keep the crypto trading environment active and growing. Due to ever-present price fluctuations, crypto traders would mostly be discouraged from acquiring and selling cryptocurrencies outside of the established names like Bitcoin and Ethereum.

However, since market makers provide the much-needed liquidity, traders can minimize their potential losses and make investments with considerably fewer risks. In this regard, crypto MMs function similarly to their fiat counterparts, but they have a more substantial influence in facilitating industry growth. Without them, numerous cryptocurrencies would have problems entering the market, much less hoping to achieve their ambitious forecasts.

While market makers are not the most popular or famous branch of the financial industry, they are the pillars of the modern global economy. Stable currency makes the global business feasible, profitable and growth-driven. Without MMs, currency stability would be a much tougher feat to achieve.

The same is true for crypto MMs, but in a much more dramatic fashion. They enable this sprawling yet unstable market to function seamlessly and grow without interruptions. While this continuous injection of liquidity is still not enough to negate the constant volatility of crypto, MMs make this industry much more stable and attractive for traders around the world.