What is a market maker and how does it differ in crypto and traditional financial markets? At the European Blockchain Conference in Barcelona, Cointelegraph discussed this topic with key market makers in the crypto industry in one of the first panels of the conference.
Cointelegraph reporter Joseph Hall drew the analogy that crypto market makers are like cool bartenders at a very sophisticated and shamelessly stupid cocktail party. Their job is to keep the drinks flowing, i.e. to provide liquidity and make sure everyone is having a good time while maintaining order in the market.
Cointelegraph @JoeNakamoto hosting the panel “Why market making is key to cryptocurrency market recovery” at the European Blockchain Convention, where he so eloquently described what a market maker is pic.twitter.com/3EoJnNXLyU
— Cointelegraph (@Cointelegraph) February 16, 2023
That means they secretly hope no one gets too drunk, makes a fool of themselves, and destroys everything. Ultimately, market makers are there to manage risk and ensure that bouncers exit as Sam Bankman-Fried and other bad actors.
Crypto market makers are basically the ultimate party planners, but instead of balloons, cakes and a blasting Spotify playlist, they use leverage algorithms and order books. Stef Wynendaele, head of trading strategy at a major crypto market maker, suggested that “it’s a great definition, but it implies too much power for what a market maker does.”
“We’re actually a dance floor.” We are actually music. We’re there to support, you know, the party. We are there every moment. We’re there at 9pm and we’re there at 5am.’
Wynendaele suggested that market makers are the foundation of a thriving crypto economy and that they are not really “the bartender who controls who drinks or doesn’t.”
For Patrick Heusser, Chief Commercial Officer of Crypto Finance, the bartender analogy works well. “Someone has to do the logistics,” he explained. “Somebody has to make sure there’s enough beer and things for drinks in the back – and market infrastructure is very important to market makers.”
“Otherwise you just have fancy flashing price screens, and if you can’t settle or if you’re not comfortable settling certain trades with certain counterparties, the market isn’t as attractive as it should be.”
So if the crypto economy were a party, the market makers could be the dance floor, music and logistics.
Guilhem Chaumount, CEO of France-based market maker Flowdesk, explained that we also need to remember that in the crypto space “there is not one column, there are dozens of columns. Some of them are centralized or decentralized. They are open 24/7, 365. You have so many cocktails, 20,000 cocktails available. You don’t know what’s in them.”
In addition, “Prices are not in US Dollars or Euros and Bitcoins (BTC) and any crypto,” highlighting the difference between traditional financial market making and crypto market making.
For traditional finance, Chaumont explained, it’s mostly “proprietary trading firms that operate off their balance sheet and try to generate profits and losses.” Whereas in cryptocurrencies there is a more technological approach as the assets are infinitely more difficult.
After an extensive career in traditional finance, John Murillo, director of trading at B2Broker, explained that the way brokers choose market makers remains the same: “You just choose which party to attend, because everyone has a party.”
“Our approach to cryptocurrency creators is no different than it was in my old days, where you evaluate counterparties, where you pick and choose who you want to connect and integrate. I think that is the key to creating a reliable solution.”
All in all, Chaumant summarized that market makers have “a huge responsibility”. He shared that while Bitcoin (BTC) was able to recover $25,000 recentlyThe industry does not recover without the help and assistance of market makers.