While various market making techniques like high-frequency trading are usually employed by large corporations and centralized exchanges to manipulate the market, it is possible for many retail traders to benefit from the same approach to trading by using a market making bot extensively on assets that do not have a high level of liquidity. A market maker plays a crucial role in providing liquidity and maintaining spreads in the exchange, helping to ensure efficient trading and tighter bid-ask spreads.
Note that many market making techniques are designed in a way to intentionally cause damage to the user’s portfolio. These losses are often offset by higher intensity of trading and potential bullish movements caused by artificially increased volumes. Market makers profit from the spread between two prices—the buy and sell price—rather than one single price, and the spread is influenced by trading volume and price differences across exchanges. It is a risky strategy to employ if you do not have a large portfolio or do not fully understand how to use automation to your advantage.
What is crypto market making?
Decentralized cryptocurrency exchanges are quite slow and cumbersome to facilitate large number of operations as many transactions occur on the P2P basis (peer-to-peer). While the absence of any third parties may be beneficial for crypto enthusiasts, it is hard to evaluate market metrics and facilitate larger trading volumes when the process of making a trade is so slow and includes many redundant actions like sending assets and money manually or chatting with another party to establish deal parameters.
Centralized exchanges largely solve these issues and offer an environment that many retail traders are familiar with after decades of working in other financial markets. The issue with CEX platforms is they often lack users to improve liquidity and volumes for some of the tokens they list. To enhance the numbers and attract more users, they often engage in high-frequency algorithmic trading and artificially improve the outlook of the market. Managing multiple exchange accounts and trading across different exchanges can help increase liquidity and trading opportunities, as traders can access a wider range of markets and tokens.
The market making, as the name suggest, is focused on increasing the market depth by filling order books with opposite orders and instantly executing them. On paper, the increase in the number of trades boosts volumes even if the real activity is relatively low. Some traders may call such practices dishonest, but in some cases HFT automated trading can be beneficial for the market as a whole.
Cryptocurrency trading bots play a crucial role in automating trading strategies for both retail and institutional clients. These bots operate continuously, executing trades based on predefined algorithms, and help maintain liquidity in volatile markets.
The cryptocurrency industry is still not a mainstream investment destination for millions of laymen. While the recent approval of Bitcoin ETFs caused a significant commotion in various financial circles and dramatically raised the awareness of large capital holders who were not familiar with the world of crypto, we still see that many tokens do not see any action.
For people invested in certain obscure tokens, the absence of the interest from the public can be quite frustrating. Smart market making techniques can help individual traders to increase the activity and boost numbers for tokens that they like.
There are several things that you must carefully control when engaging in market making:
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Spreads and fees. Depending on the type of the CEX platform you work with, you may face different fees and commissions when opening market positions. Make sure that filling order book does not drain your portfolio and cause irreparable damage.
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Know when to stop. Market making is often a way to boost the activity and attract retail traders to the asset in question. When you see an increase of orders, you should temporarily stop high-frequency trading and focus on extracting profits from orders created by other market participants.
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Learn how to use a market making bot for crypto. Setting up an automated trading system can be quite challenging for people unfamiliar with robots and scripting in financial markets. Focus on mastering the skill of bot building before engaging in complex strategies like market making.
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Do not work with “dead” tokens. Despite any beliefs you may have about the future of a given token, it won’t get traction even if you invest everything in market making unless there is public interest. Many purpose-driven blockchain projects ultimately failed to capture an audience and vanished from the market. Pick your coins carefully.
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Trade on an established CEX platform. Many centralized exchanges have a variety of tokens to select from. Work with companies that look trustworthy. If you choose a platform that has thousands of tokens but engages in shady business practices, you may lose everything.
Understanding Crypto Trading Bots
Crypto trading bots are automated software programs designed to execute buy and sell orders on behalf of traders, following predefined algorithms and responding to specific market conditions. These trading bots operate around the clock, allowing traders to participate in the cryptocurrency market without being tied to their screens. By removing emotional decision making from the equation, a crypto trading bot can react to market changes instantly, ensuring that trades are executed at optimal times.
Trading bots are especially valuable in the fast-moving world of crypto trading, where price swings can happen in seconds. They enable traders to implement complex trading strategies that would be difficult to execute manually, such as placing simultaneous buy and sell orders or managing multiple trading pairs across different markets. For market makers, these bots help maintain a tight spread and healthy order book depth, making tokens more attractive to other traders and investors. By leveraging crypto trading bots, traders can enhance efficiency, capitalize on market opportunities, and maintain a consistent presence in the market.
Benefits of Automated Trading
Automated trading brings a host of advantages to both new and experienced traders. One of the most significant benefits is the ability to trade continuously, without the need for sleep or breaks, ensuring that no market opportunity is missed. Trading bots eliminate emotional decision making, which often leads to costly mistakes, and instead execute trades based on logic and pre-set rules. This consistency is crucial in volatile markets, where prices can shift rapidly and human reaction times may fall short.
With automated trading, traders can implement complex trading strategies that would be challenging or time-consuming to execute manually. Market making bots, in particular, are designed to provide liquidity by placing both buy and sell orders, helping to stabilize the market and attract more participants. These bots also offer powerful risk management tools, allowing traders to fine-tune their approach and adapt to changing market conditions. By using trading bots, traders can focus on developing profitable strategies while the bots handle the execution, making automated trading a powerful tool in any trader’s arsenal.
How to Use Market Making Bots for Crypto
To get started, you need to find a good supplier of automation solutions. While it is possible to run software locally or use the limited functionality offered by your CEX platform, it will be impossible to run a complex automated trading system without some advanced instruments which can be found only on specialized automation websites. Reliable API connections are crucial for seamless integration with exchanges; if these connections fail or are vulnerable, it can disrupt your trading bot, cause unintended trades, or pose security risks.
Setting up a bot is not a hard task if you follow instructions to the letter. For example, WunderTrading has a wide range of different tutorials, educational videos, guides, and other content to quickly catch you up to speed with the latest advancements in the crypto automation industry. When creating and refining an automated trading bot, it is important to use historical market data for backtesting to ensure your strategy performs well before going live.
However, you need to be careful when creating a crypto trading bot for crypto market making. Here are some tips to avoid unnecessary risks and make market more efficiently:
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Set up several trading accounts. It is possible to run multiple trading accounts on a single CEX platform. Some companies allow you to create several accounts to trade with. Some exchanges do not allow it, but you can ask friends to join you in this endeavor and “borrow” their accounts to place additional orders. It is faster to work with multiple accounts and increases the speed of order placement with multiple bots engaged.
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Make sure to test your bots before launching. Every single automated trading strategy should be vigorously tested before launched in real market conditions. Make sure to run a couple of tests on demo accounts or run the backtesting feature on WunderTrading. Since you don’t need to rely on technical analysis to make this system work, the testing process is simpler yet may require some additional time if you plan to run multiple bots. Evaluating your bot's performance against other trading bots can help you ensure optimal results and improve your strategy.
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Set up each bot individually. You will need at least two types of bots if you plan to build a market making system manually. One will be placing buy orders and another one will be placing sell orders. If you place these orders simultaneously, they will be executed automatically. However, you will need to pay fees on the transaction. To avoid errors, make sure to test the system preemptively and spend more time on double checking the parameters of the automated trading system.
Setting Up a Market Making Bot
Setting up a market making bot involves more than just activating a program—it requires careful planning and attention to detail. Traders must first define their user-defined strategies, setting clear parameters for the bot to follow, such as the bid price, ask price, and minimum amount for each trade. It’s important to consider current market conditions and market volatility, as these factors can significantly impact the effectiveness of a market making strategy.
Market makers should use historical data to backtest their strategies, ensuring that the bot performs well under various scenarios before deploying real funds. Risk management is also essential; setting appropriate limits and monitoring the bot’s activity can help prevent unexpected losses. By providing liquidity through a market making bot, traders can attract other market participants and potentially profit from the spread, but they must remain vigilant and adjust their strategies as market conditions evolve.
Building a Trading Strategy
Developing a robust trading strategy is key to long-term success in the cryptocurrency market. Traders should start by analyzing market trends and conditions to identify profitable opportunities. Technical analysis—such as tracking price movements, trading volumes, and chart patterns—can help pinpoint the best times to enter or exit trades. Fundamental analysis, which involves evaluating the underlying token projects and broader cryptocurrency market, provides additional context for making informed decisions.
A solid trading strategy should always incorporate risk management techniques, such as setting stop-loss orders and determining appropriate position sizes, to minimize potential losses. Paper trading is a valuable tool for testing strategies in a risk-free environment, allowing traders to refine their approach before committing real funds. By combining technical and fundamental analysis with disciplined risk management, traders can build strategies that adapt to market trends and changing conditions, increasing their chances of success.
Backtesting and Refining Your Strategy
Backtesting is a crucial step in developing an effective trading strategy. By applying your strategy to historical data, you can evaluate its performance and identify any weaknesses before risking real funds. This process allows traders to see how their market making bot would have performed under different market conditions, making it easier to fine-tune parameters and improve results.
Refining a trading strategy is an ongoing process. As market conditions change, traders should continuously monitor their bot’s performance and make adjustments as needed. Advanced features like artificial intelligence and machine learning can help optimize strategies by analyzing large datasets and adapting to new trends. By combining thorough backtesting with regular refinement, traders can ensure their market making bot remains effective, responsive to changing market conditions, and capable of minimizing risks while maximizing potential returns.
How to manage risk with a market making bot
There are several important risks associated with market making. These should be carefully considered by any investor interested in engaging in this market manipulation method. Here are some risks to consider:
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Low ask-bid spread. Making money on the difference between prices is hard on its own. Sometimes, despite your best efforts, traders won’t create a significant enough difference to profit from. Often, you will have to switch to another asset after spending money on poorly executed orders.
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Instant order execution. Since other traders place orders too, it is possible to have one of your positions liquidated instantly without another meeting the necessary conditions to be fulfilled. You will lose money on both transactions. It is important to track the ask-bid spread attentively and look out for other market making investors who may engage in similar strategies.
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High portfolio exposure. You will need a large capital to make this strategy work. Placing orders for both buying and selling places additional stress on your portfolio. Since you often have to work with several tokens, the requirements for capital size are quite high and prevent many retail traders from entering the market.
If you pick the right automation vendor, you will have a rich selection of tools to finely tune your trading bots and protect your portfolio from unnecessary risks. Adjust delayed orders, position sizes, and other parameters to reduce the risks and potential losses. In advanced market making systems, robust risk control mechanisms are essential for minimizing losses caused by volatility, errors, and competition.
While market making bots offer potential benefits such as increased efficiency and profit opportunities, these advantages depend on careful configuration and ongoing risk management.
How to choose a market making bot for crypto
Picking the right crypto automation provider is crucial for the success of your investment activities related to market making. There are several important automation-related factors that ultimately determine the outcome of your trading routines:
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Service uptime. If your automation vendor experiences downtime more often than in 0.0001% of times, it can lead to significant issues. Even these periods of downtime can be detrimental under unfortunate circumstances, but it is the best the industry can do. Look for reliable providers that work with companies such as Amazon Web Services or Microsoft Azure, or any other trustworthy supplier of cloud computing.
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Bot building capabilities. In many cases, you will need to tune your robots to perfection. Work with companies that provide many tools to build advanced bots while not overwhelming you with technical issues and unnecessary complexity. Try building a couple of automated trading systems and see how you feel doing it to find the right vendor.
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Pricing. Since market making is a strategy that often works at a loss or generates relatively low profits consistently, you should be looking into ways to cut corners. Using cheaper services from reliable providers is one of the best ways to make your bottom line look good. Work with companies that offer flexible plans and affordable prices. Many top providers also offer a free plan, allowing users to try out basic features at no cost before committing to a paid plan.
When choosing a provider, it's important to select the right crypto trading bot that aligns with your trading goals, such as risk tolerance and desired outcomes. Look for features like portfolio rebalancing, which can help maintain your preferred asset allocation and manage risk as part of your automated trading strategy.
We strongly suggest learning more about market making and spread trading before engaging in such complex strategies that involve careful planning, risk tolerance, and a large portfolio to even consider doing. If you decide to run a market making system, work with companies that offer the necessary functionality to build advanced trading bots and do not try to run such strategies manually.
