Glossary · Market Structure
Market Maker
Also: market makers, market making firm
Published
Market Maker — A market maker is a firm that continuously quotes both a bid and an offer on a trading venue, providing liquidity to participants who want immediacy and earning the spread between the prices it buys and sells at while managing the inventory risk that results. On centralized digital asset exchanges, market making is algorithmic.
The Economics of Quoting
A market maker posts a bid below and an offer above its estimate of fair value. When a participant sells into the bid or buys from the offer, the market maker earns the spread but takes on inventory. If the market moves against that inventory before it can be offset, the loss can exceed the spread earned. Quoting strategies therefore adjust the width and skew of quotes continuously based on volatility, order book depth, and the inventory already held.
Why Venues and Issuers Engage Market Makers
An order book with no resting quotes cannot execute anything. Venues engage market makers to guarantee displayed depth and tight spreads, often through fee rebates or formal programs with quoting obligations. Token issuers and ETF or structured product issuers engage them so that secondary market prices stay close to fair value and participants can enter and exit at reasonable cost. The design of those incentives, including obligations on uptime, spread, and depth, is part of the engagement.
Market Makers and OTC Desks
Many institutional liquidity providers do both. The market-making book on venues supplies the inventory and hedging capacity that lets the OTC desk price blocks, and the OTC flow informs where the market-making algorithms should lean.