How Market Maker Bots Can Benefit Your Trading Strategy



Many contemporary retail traders do not chase huge profits and focus on building a source of passive income that can consistently produce profits in the long run. Many strategies capable of delivering such performance have been developed by professional analysts. Some modern approaches appear to be more effective.

Experienced retail traders with large enough portfolios often run a crypto market making bot to extract profits from tiny discrepancies between bid and ask prices. It is an excellent method of trading due to a multitude of reasons:

  • You can easily automate the process. Use advanced trading automation instruments to create bots that will instantly react to price fluctuations and search for favorable bid/ask spreads to earn money without any supervision.
  • The crypto market is quite volatile. Unpredictable price movements can be dangerous yet often result in larger bid/ask spreads compared to traditional assets like stocks, commodities, and bonds.
  • Technical analysis is less complicated. The only bit of real analytical work must be done when you are looking for moments when bid and ask prices may diverge far enough to warrant a safe entry and allow for significant profits for market makers.

The biggest entry barrier is the capital requirement. An investor interested in market-making strategies must have a large portfolio with sufficient amounts of assets to act as a middleman and earn profits on the difference between prices. It often means that you need to have both assets from the target cryptocurrency pair in sufficient quantities to benefit from spreads.

A potent crypto market-making strategy targets several cryptocurrency pairs forcing investors to spread their resources thin. If you cannot afford to use assets frivolously and move them quite often, market-making may not be for you. On the other hand, one can focus on a single cryptocurrency pair and earn money consistently even with a relatively small portfolio.

The impact of market maker bots on trading

While these systems appear to be quite useful and safe for investors, they do influence the market as a whole. The massive influx of market makers also dilutes the pool of liquidity providers making it harder for everyone to extract profits from bid/ask spreads. Nevertheless, automated market-making trading strategies, prevalent in today's electronic financial markets, are capable of reshaping market dynamics and investment methodologies.

Here are some ways in which market-making bot users affect the cryptocurrency ecosystem:

  • These systems are the lifeblood of market liquidity, with statistics showing that they collectively account for a substantial portion of trading volume. In the U.S. equities market, automated market makers facilitate around 50-60% of total trading volume, ensuring constant bid and ask prices for assets. The same is true for the crypto market where all centralized exchanges engage in HFT market making.
  • Through sophisticated algorithms, automated crypto market-making bots assimilate vast arrays of market data to determine optimal pricing. Studies reveal that markets with active automated market makers exhibit higher price efficiency metrics, such as reduced bid-ask spreads and decreased price volatility. Individual retail traders massively benefit from more accurate pricing, minimizing the occurrence of mispricings and arbitrage opportunities.
  • The proliferation of automated market-making systems intensifies market competition. By operating non-stop, reacting instantly to market shifts, and handling a multitude of transactions concurrently, these systems foster a competitive landscape. Empirical evidence suggests that heightened competition from automated market makers correlates with tighter spreads and diminished trading costs, amplifying benefits for traders.
  • Traders leverage automated market-making strategies in crypto as indispensable tools for risk mitigation. One can swiftly hedge their positions or manage exposure to volatile assets. Research indicates that traders employing automated market maker software for risk management purposes experience enhanced portfolio stability and reduced downside risks during turbulent market conditions.
  • Automated market-making systems democratize market access by inviting more individual traders into the sector and allowing everyone to benefit from liquidity provision. The prevalence of these systems empowers retail traders and smaller investors to engage actively in financial markets.

Some studies of the crypto market show that 9 out of 10 centralized exchanges and brokers engage in market-making trading strategies to ensure higher cash flows and attract users to their platforms. However, there is still room for individuals interested in liquidity procurement for exchanges. Some even partner with trading platforms to offer market-making services.

Note that automation is a necessity when you are looking into market-making strategies. Humans cannot compete with fully autonomous systems demonstrating outstanding speed, quick decision-making, and emotionless behavior.

Integrating market maker bots into a trading strategy

Adding an HFT market maker to your portfolio should not be done on a whim! You should contemplate the ups and downs of the system and consider risk management techniques to use and portfolio objectives. You also need to work with a reliable crypto market-making bot provider to ensure that your automated systems run smoothly and without any issues.

Before implementing a market-making strategy, think about everything that can go wrong::

  • Understand that such strategies require dwelling deep into market-making principles, including bid-ask spread mechanics and liquidity provision strategies. Automated MM systems are responsible for up to 60% of total trading volume.
  • Assess investment goals and risk tolerance. Crypto market-making strategies, known for their low correlation with traditional assets, can bolster diversification. Studies indicate that adding a crypto trading bot for market-making to a diversified portfolio enhanced risk-adjusted returns by up to 30%.
  • It is necessary to implement robust risk management protocols tailored to market-making strategies. According to fintech industry data, firms utilizing advanced risk management techniques in market-making operations saw a 20% decrease in risk exposure, enhancing overall portfolio resilience.
  • You need a sufficiently large portfolio to allocate enough assets for market-making endeavors. A survey of institutional investors revealed that allocating 5-10% of total portfolio capital to market-making strategies yielded optimal risk-adjusted returns.
  • You must continuously monitor strategy performance and key metrics. High-frequency trading firms, leveraging the power of a crypto market-making bot, reported an average annual return exceeding 20% through continuous monitoring and optimization of trading algorithms.

How to add a crypto market-making bot to your portfolio?

The WunderTrading platform allows its users to utilize the power of automation for a wide range of purposes including copy trading, statistical arbitrage, and market making. The latter can be done by carefully tinkering with the settings of any custom bot. You should remember that bots only execute algorithms. Their performances wholly depend on your decisions and chosen strategies.

One must use a rich selection of technical analysis tools to identify favorable moments to enter the market. It is important to use time-tested approaches and dedicate time and effort to searching for the best combination of crypto market-making bot settings. Below are several strategies commonly used by experienced market makers in traditional equity markets which can be applied to crypto trading just as well.

Delta Neutral Market-Making Strategy

A zero-sum game is not always unprofitable. In fact, one of the most popular approaches to market-making is to attempt to eliminate risks associated with sudden price movements. Holding an asset usually exposes Market Makers to the risk of price movement in the opposite direction.

Here's an illustration of this concept:

When a Market Maker's order is filled on Exchange A, they promptly place an order on Exchange B in the opposite direction. By establishing equal and opposite positions on both exchanges, the Market Maker effectively offsets the risk of loss on one exchange with a corresponding profit on the other making it possible to earn on spreads while not worrying about unfavorable price changes.

Stoikov Market-Making Model

This method is quite complicated and requires a lot of tinkering before it can be successfully automated. The approach involves identifying the most optimal bid and ask prices with inventory management in mind. It takes into consideration a wide range of factors including statistical probabilities of price changes and assets in the inventory at any given moment.

Here are some interesting things about the Stoikov market-making strategy:

  • Stoikov Market Making involves continuously placing bid and ask orders in the market, aiming to capture the bid-ask spread while aiming at the gap within standard price deviations.
  • Stoikov Market Making seeks to optimize order placement to minimize adverse selection and maximize profitability. It means working in markets where price movements are somewhat predictable allowing market makers to benefit from safer operations.
  • It employs risk management techniques to mitigate exposure to adverse price movements, such as using limit orders and monitoring inventory levels closely. Using stop-loss and take-profit orders for the crypto market making bots based on this methodology is also beneficial.

Calculations are based on monitoring acquisition prices, time of acquisition, inventory of acquired assets, and closing times. You can find a suitable strategy on TradingView and use it to run a market-making strategy that works well for crypto. However, continuous supervision and adjustments are needed for this system to run smoothly.

GRID trading

Since GRID bots attempt to stay within certain price ranges, it is possible to use them as core components of a market-making strategy. The reason why it works well is in the question “What Is a Market Making Bot?” In short, it is a type of automated trading system that attempts to extract profits by closing price gaps. GRID bots are essentially market makers when they are instructed to stay within certain price ranges.

The WunderTrading platform has a powerful GRID bot in its catalog. You can use advanced settings to adjust risk levels and inform its behavior in the market. Below are several reasons to use these bots as market makers:

  • GRID bots maintain continuous bid and ask orders, ensuring liquidity availability regardless of market conditions. By navigating within the price gap, they produce consistent profits for retail traders running them.
  • GRID bots facilitate the execution of large trades with reduced market impact by providing liquidity at multiple price levels creating smoother asset transitions for everyone while maintaining a steady stream of earnings to users.
  • These bots operate autonomously, executing trades swiftly and efficiently, enabling market-making activities around the clock without human intervention. It also means that a retail trader can set them up once and turn their attention to other important matters.
  • At WunderTrading, you can adjust GRID bots and make them employ risk management mechanisms to mitigate exposure to adverse price movements, such as setting limits on order sizes and monitoring market volatility in real time.

The main takeaway

Using a crypto market-making bot is a way of creating a stream of passive income while actively participating in the cryptocurrency ecosystem. You can easily automate any market-making strategy out there using WunderTrading’s technological platform.


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