Is there really market manipulation by crypto market makers?

Is there market manipulation by crypto market makers?

Author: Day; Source: Plain Talk Blockchain

In the encryption industry, behind the violent fluctuations of some tokens, there is often the shadow of market makers. As the hidden “market maker,” they are often accused by the encryption community of “market manipulation.” Recently, the hot Worldcoin was revealed to have signed an agreement with market makers to borrow tokens to five market makers to provide liquidity for WLD.

Today, let’s briefly understand the mysterious “market maker”.

01 What is a market maker

To understand market makers, we need to first understand the concept of liquidity. If an asset can be sold in full and quickly, we can say that it has good liquidity. On the contrary, if an asset can only be discounted or takes a long time to sell, it lacks liquidity. It describes the degree to which buyers and sellers in the market can buy and sell relatively easily, quickly, and at a low cost. Just like the pools in DEX, when we buy in different dexes with the same amount of funds, there will be differences in the amount purchased between UNI and CRV, or when selling the same amount, there will be differences in the amount of funds obtained. This is liquidity. We should understand that the liquidity of a project can directly determine the life or death of the project. If there is no liquidity, the project is equivalent to direct death. When the project party rushes to list on certain leading platforms (listing on certain platforms means good news), it is because listing on these platforms means enhanced liquidity and more potential users.

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And market makers, which will be mentioned today, play a major role in providing liquidity to the market. Many market manipulations are also based on liquidity.

The concept of market makers originated from the securities market, but it also applies to the encryption market. Market makers play multiple important roles in the encryption market and play a key role in the development and operation of the market.

Here are the main functions of cryptocurrency market makers:

• Provide liquidity

• Market makers provide a high-liquidity environment for market participants by constantly providing bid and ask prices, promoting fast transactions, reducing costs, and increasing participation;

• Maintain market stability

• During market fluctuations, market makers balance supply and demand by constantly adjusting pricing strategies and executing trades, prevent drastic price fluctuations, maintain market stability, and provide a more reliable environment;

• Promote market development and maturity

• Market makers provide liquidity for start-up projects, increase market attractiveness and tradability, attract more investors to participate in the market, and promote market development and maturity;

• Provide consultation

• As important participants in the market, market makers have accumulated rich market data and information, which are of great reference value to clients and can help them make wiser investment decisions.

The clients of market makers mainly include the following categories:

• Trading platforms: Trading platforms need to provide a highly liquid market environment to attract more investors and funds to enter the platform;

• Investment institutions: Investment institutions usually need to conduct large-scale transactions in the market, so they need sufficient liquidity support. Market makers help investment institutions efficiently execute trading strategies and reduce costs;

• High-frequency trading companies: Market makers provide fast execution and low-latency environments for high-frequency participants, meeting their needs for high-speed trading;

• Individual investors: Although individual investors trade on a smaller scale in the market, they can also benefit from the services provided by crypto market makers.

02 Market Maker Development

The development of crypto market makers has gone through the following stages:

• Initial stage

• At the early stage of the crypto market’s emergence, the lack of liquidity was a major problem. The platform’s order book was often sparse, with large bid-ask spreads and high costs. At this stage, some individuals or small teams started to provide market-making services to improve market conditions by providing quotes and liquidity. Early arbitrage also falls into this category;

• Specialization stage

• With the development and maturation of the crypto market, more and more specialized market makers have emerged. These market makers are typically composed of professional teams or companies that have more abundant capital, technology, and market experience. They adopt more advanced algorithms and trading systems, providing higher-quality liquidity and tighter bid-ask spreads;

• Institutional participation stage

• With the increasing interest of institutional investors in the crypto market, more and more traditional financial institutions and institutional investors have started to participate in crypto market-making businesses. These institutions usually have larger capital and more sophisticated risk management capabilities, enabling them to provide larger-scale liquidity support and bring more participants and trading volume to the market;

• Innovation and intensified competition stage

• As the competition in the crypto market intensifies, market makers are also constantly innovating and improving. Some market makers are starting to explore new trading models and strategies, such as high-frequency trading, arbitrage, etc., to improve efficiency and profit. At the same time, the continuous progress of technology provides market makers with more tools and means, such as machine learning, big data, etc., to optimize trading decisions and risk management;

• Liquidity incentives

• Here, it is worth mentioning that Uniswap’s innovative Automated Market Maker (AMM) is also a type of market maker. It allows anyone to participate in market-making and receive rewards, which has contributed to the rapid development and continuous innovation of DeFi;

• Compliance and regulatory strengthening stage

• With the development of the crypto market, regulatory authorities are also strengthening their supervision of crypto transactions.

In general, market makers in the cryptocurrency industry continue to evolve and adapt to meet market demands and provide a more efficient buying and selling environment. They play an important role throughout the entire period of the cryptocurrency market.

03 Profit Models of Market Makers

Like traditional market makers, cryptocurrency market makers also profit from the price difference between buying and selling. However, due to the lack of regulation in the cryptocurrency market, the cost of misconduct is very low. Information flow and decision-making power are mainly controlled by the top players in the industry. Market makers in the cryptocurrency industry are easily associated with “market manipulation,” and retail investors are often the ones being exploited.

1) The profit models of market makers mainly come from the following aspects (can be openly discussed):

• Spread: Market makers profit by providing simultaneous buy and sell quotes in the market and exploiting the price difference. They set a lower buying price and a higher selling price to obtain profit from the difference. This price difference is commonly known as the “spread” and is one of the main sources of profit for market makers;

• Trading fees: Market makers, while providing liquidity, also charge fees according to the platform’s regulations. These fees are the costs paid by participants to the platform, and market makers, as liquidity providers, can earn a portion of these fees as profit;

• Arbitrage trading: Market makers often take advantage of price differences between different platforms or market fluctuations to engage in arbitrage and earn profits. This type of arbitrage operation usually requires fast execution speed and highly automated trading systems;

• Liquidity rewards: Some platforms or protocols provide rewards to market makers who provide liquidity, such as token rewards.

It can be seen that the revenue sources of market makers mainly consist of two parts:

A. Serving project teams

B. Serving trading platforms

2) Relationship between Market Makers and Project Teams

The relationship between project teams and market makers is mainly established through the provision of liquidity services, especially when new projects are launched and require price management. Market makers play three main roles:

A. Providing liquidity

B. Stabilizing prices to prevent project failure due to excessively high or low prices

C. Managing market capitalization to increase project visibility

In addition to providing liquidity, market makers also help project teams develop token pricing strategies and assist with team token sales. The cooperation terms and contracts between market makers and project teams specify the rights and obligations of both parties, including reserve requirements, cooperation periods, profit sharing, and other issues. In general, the cooperation methods and terms between project teams and market makers may vary depending on the specific circumstances of both parties. Cooperation should be based on consensus and compliance with relevant legal frameworks. Market makers choose well-known projects to cooperate with to increase brand exposure, and project teams also choose reputable market makers to increase the success rate of their projects. It is worth noting that many market makers are also investment institutions, which allows them to provide better support for investment projects.

3) Relationship between Market Makers and Trading Platforms

Liquidity is the fundamental infrastructure of a trading platform, so the platform will provide many benefits to market makers, such as fee discounts, leverage funds, deposit and withdrawal limits, API internal channels, and institutional client accounts/accounting systems, etc. These benefits are designed to attract and support market makers in providing liquidity support to the trading platform.

It should be noted that different platforms may have different requirements and cooperation models for market makers. Some platforms may designate specific market maker partnerships, and new projects must cooperate with designated market makers to list.

As the top of the food chain in the cryptocurrency industry, market makers do not guarantee profits and also face market risks and liquidity risks. The collapse of Luna in the past led to a comprehensive failure of market makers and market liquidity depletion. However, this is also related to the imperfect regulation and lack of transparency in the industry, as well as various issues such as misappropriation of user funds and arbitrary leverage. Alameda Research is a typical representative of this.

04 Mainstream Market Makers

There are many market makers in the cryptocurrency industry, but due to the significant difference between the cryptocurrency market and traditional finance, it is easy for market makers to form a monopoly when cooperating with trading platforms, and the market liquidity is dominated by a few large market makers. Here we introduce several well-known ones (many market makers for projects are not disclosed publicly, so only a few are listed here):

• Jump Trading: A high-frequency trading giant established in 1999. Market making projects: Solana ecosystem, various dex, LUNA, MASK, LDO, etc;

• Wintermute Trading: A digital asset algorithmic trading company established in 2017. Market making projects: OP, BIUR, ARB, etc;

• DWF Labs: A global Web3 venture capital and market making company suddenly entered the public eye in 23 years. Market making projects: CFX, MASK, ACH, FET, YGG, recently accused of market manipulation due to significant fluctuations in projects such as YGG and DODO;

• Sigma Chain: A cryptocurrency trading company registered in Switzerland, the SEC referred to CZ as its actual owner in the litigation documents against Binance;

• Galaxy Digital: A cryptocurrency and blockchain asset management company established in 2018;

• B2C2: A cryptocurrency financial services company established in 2015, conducting cryptocurrency asset trading and market making globally;

• GSR: A cryptocurrency financial services company established in 2013, headquartered in Hong Kong;

• Amber Group: A global cryptocurrency fintech company headquartered in Hong Kong, established in 2017.

The market making services and specific details of many projects are undisclosed, and many comments are leaked from interviews with market makers, mostly in a state of “making a fortune quietly”. After all, if ordinary investors know who “cut” them, their reputation is not guaranteed, so it is better to remain hidden. Just like the previous information and various details about WLD market making, they were all dug out by netizens from various details.

05 Summary

Above is the relevant content about market makers. As key participants in the cryptocurrency market, market makers play an important role in maintaining market liquidity, improving market efficiency, and reducing costs. For investors, understanding the relevant knowledge about market makers will be helpful for participating in the market.

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