Why Do Cryptocurrency Exchanges Need Market Makers?

Every second, crypto exchanges process thousands of trades worth millions of dollars. Behind that seamless experience sits a group of participants most traders never think about: market makers.

These firms keep order books filled and spreads tight, making it possible for you to buy or sell instantly rather than waiting for another trader to show up. This article explains how market makers operate, why exchanges depend on them, and what their presence means for both retail and institutional traders.

What Is a Market Maker in Crypto

Crypto exchanges rely on market makers to keep trading active around the clock. These firms or individuals place buy and sell orders continuously, which means when you want to trade, there's almost always someone ready to take the other side. Without them, you'd often find yourself waiting for another trader to show up with a matching order.

Market makers earn money from the spread, which is the small gap between the price they'll buy at and the price they'll sell at. Think of it like a currency exchange booth at an airport—they buy your euros at one rate and sell them at a slightly higher rate, pocketing the difference.

Here are the key terms worth knowing:

• Bid price: The price a market maker will pay to buy from you
• Ask price: The price a market maker will charge to sell to you
• Spread: The difference between these two prices, which is how market makers get compensated

How Crypto Market Making Works

At its core, market making is about always being available to trade. A market maker quotes both a buy price and a sell price for a cryptocurrency, then updates those quotes as conditions change. This constant quoting is what keeps an exchange functional even at 3 AM on a Sunday.

Providing Liquidity to Order Books

When you look at an exchange's order book, you'll see rows of buy and sell orders stacked at different prices. Many of those orders come from market makers rather than individual traders. They fill the order book so that when you click "buy" or "sell," your trade goes through immediately.

Without this standing inventory of orders, trading would be slow and unpredictable. You might place an order and wait hours for someone else to come along with a matching one.

Enabling Price Discovery

Market makers help establish what an asset is actually worth at any given moment. As they adjust their buy and sell prices based on supply, demand, and broader market signals, they contribute to what's called price discovery.

This process is how markets figure out fair value. When multiple market makers compete and update their quotes, the resulting prices tend to reflect genuine supply and demand rather than random guesses.

Managing Bid-Ask Spreads

Competition among market makers typically pushes spreads tighter. When several firms are competing to provide liquidity, they'll offer better prices to attract order flow. Tighter spreads mean lower trading costs for everyone using the exchange.

Wide spreads, on the other hand, usually signal thin liquidity or uncertainty. If you see a large gap between the best buy and sell prices, it often means market makers are being cautious or there simply aren't enough of them active on that trading pair.

Reducing Market Volatility

Market makers act as a buffer against sudden price swings. When a large sell order hits the market, they can step in and buy, absorbing some of the selling pressure. The same works in reverse—they can sell into sudden buying frenzies.

This stabilizing effect matters because extreme volatility tends to scare away traders. An exchange where prices whip around unpredictably is less attractive than one where prices move more smoothly.

Why Cryptocurrency Exchanges Depend on Market Makers

Exchanges compete fiercely for users, and the quality of their liquidity is a major differentiator. An exchange with active market makers offers a better experience than one without, which attracts more traders, which in turn attracts more market makers.

Deeper Order Books and Tighter Spreads

An exchange with substantial market maker activity can handle large trades without the price slipping dramatically. If you're trying to buy a significant amount of Bitcoin, you want plenty of sell orders available at prices close to the current market rate.

Deeper order books also signal a healthy market. Traders gravitate toward exchanges where they can execute their strategies efficiently.

Faster Trade Execution

Standing liquidity from market makers means your orders fill right away. You click buy, and the trade happens at or very close to the price you saw. This immediacy is something traders often take for granted until they use an exchange without it.

On thinly traded markets, you might watch the price move against you while your order sits unfilled. That frustration drives traders toward more liquid venues.

Greater Market Stability

During periods of panic or euphoria, market makers provide a cushion. They're willing to buy when others are selling frantically, and sell when others are buying aggressively. This willingness to take the other side of emotional trades helps prevent the kind of flash crashes that erode confidence.

Improved Exchange Competitiveness

Exchanges that maintain strong relationships with quality market makers tend to outperform their competitors over time. Higher liquidity leads to higher trading volume, which generates more fee revenue, which allows the exchange to invest in better technology and attract even more market makers.

It's a virtuous cycle that separates successful exchanges from struggling ones.

Types of Crypto Market Making Firms

Not all market makers operate the same way. The crypto industry has several distinct categories, each with different approaches, technologies, and business models.

High-Frequency Trading Firms

These technology-focused firms use algorithms to provide liquidity at incredible speed. They might execute thousands of trades per second, capturing tiny profits on each one. Their edge comes from faster technology and smarter algorithms rather than from taking views on where prices are headed.

High-frequency firms invest heavily in infrastructure—low-latency connections, co-located servers, and sophisticated software—to shave milliseconds off their execution times.

Professional Market Making Companies

Dedicated market making firms often work directly with exchanges under formal agreements. They commit to maintaining certain liquidity levels on specific trading pairs, and in exchange, they might receive reduced fees or other incentives.

These firms tend to focus exclusively on market making rather than combining it with other trading strategies. Their business model depends on providing reliable, consistent liquidity.

Algorithmic Trading Desks

Larger investment firms and crypto-native companies often run trading desks that provide liquidity as part of broader operations. These desks might combine market making with arbitrage, hedging, or directional trading.

For these participants, market making is one tool among many rather than the entire business.

How Market Makers Impact Centralized and Decentralized Exchanges

The role of market makers looks quite different depending on whether you're trading on a centralized or decentralized platform.

Centralized Exchanges

Centralized exchanges actively recruit professional market makers to maintain deep order books. These relationships are often formalized, with exchanges offering incentives like reduced trading fees, priority access to new token listings, or direct API connections.

The traditional order book model that most major exchanges use depends heavily on these professional participants. Without them, the order books would be thin and spreads would be wide.

Decentralized Exchanges and Automated Market Makers

Decentralized exchanges take a fundamentally different approach through Automated Market Makers, or AMMs. Instead of order books, AMMs use smart contracts that create liquidity pools. Anyone can deposit funds into these pools and earn a share of trading fees.

This model democratizes liquidity provision—you don't have to be a professional firm to participate. However, AMMs come with their own trade-offs, including something called impermanent loss, where the value of your deposited assets can decline relative to simply holding them. The pricing mechanics also differ from traditional order books, which can result in worse execution for larger trades.

Challenges Facing Crypto Market Makers

Market making in crypto carries significant risks that don't exist to the same degree in traditional finance. The unique characteristics of digital asset markets create challenges that even sophisticated firms struggle to manage.

Extreme Volatility and Flash Crashes

Crypto markets can move dramatically in minutes. A market maker might find themselves holding a position that's dropped significantly in value before their systems can react. This inventory risk is amplified by the 24/7 nature of crypto trading—there's no closing bell to provide a natural pause.

Evolving Regulatory Requirements

The regulatory landscape for crypto varies dramatically by jurisdiction and changes frequently. Market makers face compliance obligations that can shift with little warning, adding operational complexity and legal uncertainty. What's permitted in one country might be prohibited in another.

Counterparty and Technology Risks

Unlike traditional markets with established clearinghouses, crypto market makers face direct exposure to exchange failures. Hacks, insolvencies, and technical outages can freeze assets or disrupt trading with limited recourse. The collapse of several major exchanges in recent years has made this risk painfully concrete.

How to Track Market Maker Movements in Cryptocurrency

Watching what market makers do can provide useful insights into market dynamics. Several methods can help you monitor their activity, though none offer a complete picture.

Order Book Depth Analysis

Large orders clustered at certain price levels often indicate where market makers are positioning their liquidity. Watching how these clusters shift can reveal changing sentiment or anticipated price movements. If you see substantial buy orders stacking up at a particular price, market makers may view that level as support.

Volume and Spread Monitoring

Sudden changes in trading volume or bid-ask spreads can signal that market makers are adjusting their positions. Widening spreads might indicate increased uncertainty or reduced willingness to provide liquidity. Narrowing spreads often suggest growing confidence or increased competition among liquidity providers.

On-Chain Transaction Tracking

Blockchain analytics tools allow you to identify and track large wallet movements associated with known market-making firms. These on-chain signals can complement what you observe in order books, though interpreting them correctly requires context and experience.

How Institutional Investors Benefit from Market Makers on Exchanges

For institutional participants, quality market makers aren't just convenient—they're essential for executing strategies at scale.

Efficient Execution of Large Orders

Institutions often trade positions worth millions of dollars. Deep liquidity from market makers allows them to execute substantial trades without causing prices to move against them. This ability to trade size without market impact is critical for portfolio management.

Reduced Slippage on Significant Trades

Tighter spreads translate directly to lower execution costs. For institutions trading large volumes, even small improvements in spread can represent meaningful savings over time. The difference between a 0.1% spread and a 0.05% spread adds up quickly at scale.

Access to Deep Liquidity Across Multiple Markets

Professional market makers typically operate across numerous exchanges, providing consistent liquidity that allows institutions to execute strategies across multiple venues. Institutional-grade OTC desks connect clients directly to deep liquidity pools, often achieving better execution than would be possible on public order books alone.

Accessing Institutional-Grade Liquidity in Digital Asset Markets

Institutional and professional investors seeking reliable liquidity benefit from working with partners who specialize in digital asset markets. The right partner provides not just access to liquidity, but also compliance infrastructure, security protocols, and execution expertise that institutional participants require.

Sign up or enquire to access institutional-grade digital asset services.

FAQs about Crypto Market Makers

Are crypto exchanges themselves market makers?

Most exchanges are not market makers—they provide the platform where independent firms offer liquidity. While some exchanges operate internal trading desks, these are typically kept separate from core exchange operations to avoid conflicts of interest.

Is Coinbase a market maker?

Coinbase operates primarily as an exchange platform that matches buyers and sellers. It is not a market maker in the traditional sense, though affiliated entities may engage in trading activities to support the ecosystem.

How do market makers earn revenue in cryptocurrency markets?

Market makers primarily profit from the spread between their buy and sell quotes. They may also receive rebates or incentives from exchanges for providing consistent liquidity levels.

What is the difference between a market maker and a liquidity provider?

A market maker is a specific type of liquidity provider who actively quotes two-sided markets. The term liquidity provider is broader and includes passive participants, such as users who deposit funds into DEX liquidity pools.

Can market makers influence crypto prices?

While large market makers can impact short-term prices through significant trading activity, sustained price manipulation is difficult in liquid markets. Such actions may also violate exchange rules and financial regulations.