What is a market maker agreement?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
A market maker agreement is a contract in which a project pays a specialist firm to keep quoting buy and sell orders in its token. The purpose is to make a thinly traded new token actually tradable, but the firm is often paid in loaned tokens, some of which can end up on the market. That these contracts are usually not published is the part outsiders cannot see.
Key points
- A contract to keep quoting both sides of the order book
- Payment is often a token loan or an option
- Loaned tokens can be sold into the market
- Terms are usually not disclosed
Definition
A contract between an issuer or exchange and a specialist firm requiring it to continuously post limit orders in a given asset, so spreads stay narrow and trades can be filled.
A newly listed asset has few orders on either side, so small trades send the price jumping. A market maker damps that by keeping quotes on both sides, letting users fill near the price they expected. Some exchanges require a project to engage one as a listing condition.
Besides cash, a common structure lends the firm a quantity of tokens and grants it a call option to buy them at a set price when the term ends. Under that arrangement the firm can sell the borrowed tokens to build inventory, and those sales feed into market supply.
Users have almost no way to inspect the contract itself. What is observable is indirect: how deep the book is, how the spread behaves over time, and how large addresses move. A book that is unnaturally deep, or orders clustered at one price band, can hint at what is going on.
Watch out for
- · A deep-looking book can thin out abruptly when the contract ends
- · Sales of loaned tokens can move the price
- · High reported volume does not necessarily reflect real demand