The liquidity of an asset is an important parameter that helps a trader to decide whether it is worth investing in or not. The higher the liquidity, the greater the supply and demand for the asset. Any trading platform or crypto exchange must guarantee its own users liquidity for available assets. Otherwise, traders can take a long time to execute, as there is no suitable order to buy or sell. Sometimes there are situations when supply and demand are at a minimum level. In this case, the market makers start to maintain liquidity.
Who are market makers?
A market maker is a participant in the market who has made an agreement with a trading platform to maintain the value of assets. Banks, large funds, brokerage firms and individuals engaged in investing can be market makers. According to the degree of influence on the market situation, they are divided into:
The first maintains the supply and demand ratio, and are responsible for prices and trading volumes within the agreement with the trading platform. Speculative market makers can have a sole influence on price changes by manipulating large volumes of trading assets.
The main task of the market maker is to preserve the liquidity of the asset, and to maintain the possibility of a trade for users with small deposits. Thanks to them it is possible to carry out operations at an optimum price in acceptable time intervals. It is possible to name several key responsibilities of a market maker:
- Hold quotes at a specific interval.
- Provide increased liquidity when necessary.
- Prevent big price gaps.
A market maker executes many trades each day to hold increased liquidity in trading assets. He buys and sells assets at the request of users, acts as an intermediary to earn on the spread.
The market maker analyzes the situation on the trading platform not horizontally, as ordinary users are used to, but vertically. He has access to the book of orders, which contains not only buy and sell deals, pending orders, stop-losses, take-profits. The market maker provides an assessment of market trends, possible profits, the reliability of assets, and may notifies smaller players of his conclusions. After collecting all offers, the following transaction is executed: if there is no suitable buyer or seller on the platform, the firm undertakes to provide liquidity for the current orders.
How do market makers earn money? They have access to information from orders that come from users. Important data include stop-loss and take-profit indicators, as well as the parameters of pending orders. Having this information, the market maker knows in which assets the most orders are accumulated. This gives him an opportunity to manipulate prices.
To make money on the trading platform it is required to be able to forecast significant price movements competently and open positions in their direction in time. Those who can control the price movement to make money should simply create a position to buy and shift the price down. A small amount of momentum from the market maker is all it takes for a large price movement to begin.
To create this impulse, market makers, first of all, carry out the formation of a trend in the direction they require, and then begin to act in the complete opposite direction. Therefore, when the market maker makes money, other participants incur losses.
What does it take to become a market maker?
- Register on a cryptocurrency exchange.
- Submit an application.
- In case of a positive response, enter into a contract to support a certain level of value of the assets offered for purchase and sale.
However, it should be remembered that market making is a difficult profession because the entry threshold into this field of activity is quite high. It requires in-depth knowledge and experience in trading, as well as risks. A market maker must know how to manage a large volume of investments and how to use automated strategies.
Bots for market making
Any actions of players on the exchange and any trading strategies can be automated. And market making is no exception - market making bot is used for its crypto automation.
This is software that is designed to automatically operate a trading strategy on behalf of the trader. In other words, the bot takes over almost all the actions of a market player, facilitating his routine work and thus saving a lot of time.
What does the crypto market making bot do? Let's look at an example. Suppose we have a coin that is traded on some exchange - say, KuCoin. But the coin is not promoted enough, so not many people want to sell or buy it. No liquidity means no movement, and as a result, trading of the asset will either go at a very slow pace or end before it has begun. Both the owners of the coin and the trading platform will suffer.
To prevent this, the cryptocurrency market making bot places limited orders to buy and sell the coin on both sides of the current price. Immediately after that, information will appear on the exchange that liquidity increases on that coin. What conclusion will be made by the participants of the exchange? That this coin is interesting and it is necessary to invest in it. Few people will actually guess that all actions were made by KuCoin market making bot.
To achieve results, bots, like the Binance market making bot, use various automated strategies, among them the high-frequency trading strategy - the one that is characterized by high speed and short asset holdings.
Using this market making bot strategy, robots can execute multiple trades in milliseconds. They help market makers engage in efficient market liquidity maintenance. HFT strategies allow you to determine a quote, the last price, and to change it very fast and buy crypto instantly. As you can guess from the description, this is exactly what is needed for successful market making. Therefore the standard tradingview bots will be less applicable for the job.
How to Use a Trading Bot?
Before you start using a bot, be it a Bitcoin market making bot or any other, you need to keep in mind a pretty important point. If you have not signed an agreement with any exchange or payment system, in other words, if you are not a market maker, this bot will probably not work for you. Yes, it can open orders for buys and sells, but mainly it is for the purpose of market makers who are given extra benefits by exchanges or cryptocurrency owners for trading on exchanges. In other words, the fees might be much higher than the possible profit that the bot will make as a result of normal trading.
Using a market making bot crypto comes down to a few steps. They may be different for some bots or exchanges, but the essence will remain the same in any case.
- Get a bot. This can be done in several ways - buy, download from the Internet for free or develop it yourself. Each of these methods has its advantages and disadvantages - from the high price to the possibility of running into fraudsters.
- Choose which of the exchanges you will be engaged in market-making. For example, if you want to use Bitmex market making bot, all your work will take place within this exchange.
- Connect the bot to the exchange you are using via API. If you use a trading platform instead of an exchange, then the bot must be connected to it.
- Configure the bot and start working.
- How do I choose a trading bot?
The criteria for choosing a bot for market-making are similar to the criteria for choosing most bots, and software too, but we'll list them anyway, so that you don't have to waste time looking for this information.
- Features. You can guess - the more functions included in a bot, the better it will work and the more it will make your life as a market maker easier. If we're talking about the most advanced bots, you can easily delegate almost all your work to them and only occasionally check how things are going. For example, Bitfinex market making bot has a wide range of features that gives a lot of opportunities for traders.
- Security. Of course, this parameter cannot be left aside because it directly affects the safety of your money and your reputation as a market maker. So buy bots from trusted developers.
- Price. This parameter can be associated with the functionality because most often they directly depend on each other. The more functional the bot is, the more expensive it is and vice versa.
- User interface. Market making bots cannot be attributed to "install and trade" robots. Most often, they require quite a complex initial setup that involves many parameters. So, the easier this setup is, the easier it is to get started with market-making. If you do not want to spend extra hours, choose bots with a user-friendly interface and not the most complex settings. Such bots, even very functional ones, do exist - it's all a matter of skill of the developer.
Before you choose a particular bot, find reviews about it in any crypto community - if the bot is popular, there will be quite a lot of them. In addition, this way you can avoid possible encounters with fraudsters.
In conclusion, it must be said that a market maker is a valuable market participant, without which total chaos would reign on trading platforms. Once you understand market making, you can earn a good income. However, remember that successful market making requires serious knowledge as well as extensive trading experience. If you want to make your job easier and earn more, use market-making bots - even the most expensive ones will pay for themselves in a fairly short period of time. We briefly described how to choose them and how to use the above.