What is a market maker?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
A market maker continuously posts both bids and offers so that others can trade whenever they want. Its income comes mainly from the spread and from fee rebates, not from calling market direction. When market makers pull their quotes, a book can thin out very quickly.
Key points
- Posts bids and offers at the same time, continuously
- Earns mainly from the spread and fee rebates
- Always carries the risk of a lopsided inventory
- Liquidity vanishes fast when they stop quoting
Definition
A participant that continuously posts both bid and ask quotes and stands ready to take the other side, supplying liquidity. It may be a firm contracted by the exchange, or anyone acting the same way voluntarily.
A market maker might post a bid at 1,000,000 and an offer at 1,000,300. It sells to buyers and buys from sellers, and the spread between the two is its gross margin per round trip — tiny per trade, accumulated over enormous numbers of trades.
The role carries inventory risk. If selling floods in one direction, only its bids fill, inventory piles up, and any fall in price is a loss. That is why makers widen spreads or withdraw quotes entirely when volatility rises.
Exchanges try to keep them in place with low maker fees or paid contracts. Unless the contract genuinely obliges continuous quoting, though, nothing stops a maker from stepping away during disorder. A book that looks deep on a calm day is not guaranteed to be there when it matters.
Watch out for
- · Book depth is not guaranteed and can disappear during sharp moves
- · Some venues have affiliated firms making markets; check for conflicts of interest
- · Chasing maker rebates by quoting both sides means taking on real inventory risk