The positive aspects of market making outway the negative 10 fold
If you a trader or an investor, liquidity(depth of order-book) is utmost important because it allows entering and exiting the market of your choice without having an impact on the immediate price. The last thing that you want to happen is when you want to buy/sell, your position greatly impacts the price and you don't get your position filled at the price you expected(slippage). When the liquidity is deep( many participates are waiting to fill your position) you can successful enter and exit at the price you expected. As a result, you can successfully execute your positions based on your strategy without worrying about slippage. The amount of liquidity offered in Forex ( Foreign Exchange: EUR/USD) is one of the main reasons why professional traders are attracted to this market and often avoid Crypto Currencies. However, things are changing quickly as you would expect with the innovation of crypto currencies and the impact they are having on our daily lives.
Crypto Currency exchanges understand the importance of market making and give special benefits for those participates. One of the largest derivative exchanges in the world, Bitmex can have a daily volume of $4,000,000,000 on a slow day(June 10, 2018). This amount of volume is about 2 times the amount of the largest crypto currency exchange OKex that has almost 500 trading instruments and 2.4 times the amount of Binance with 350 different markets to trade on.
Why is this you may ask? Bitmex offers an incentive to participate as a market maker. If you can successfully enter your positions with Limit Orders you earn a small rebate on every position executed. Not all exchanges offer this incentive. For example, Binance will charge you a fee regardless if you use Market or Limit Order types. On the other hand, OKex offers a rebate for Futures Trading if can you meet the required 30 day volume turn over and also has a structured discount for the higher volume traders on their exchange. These incentive models are brilliant by design because it gives an incentive to provide liquidity to their exchange.
Let's move on to the next benefit of market making. We live in a highly competitive world and competition is a good thing in most cases. For markets, it allows market makers to compete for your position. Consequently, the competition has an immediate impact that decreases the spread between the best ask price and the best bid price. When you are trader spreads are just as important as deep liquidity. Having a market where the spreads are small and tight, allows more opportunity on an intraday basis. It creates opportunities for scalpers and other algorithmic strategies to enter and exit the market at intervals that are hard to comprehend for the average trader or investor.
The combination of deep liquidity and tight spreads are the conditions that professional traders expect coming from the Forex Markets.
If the crypto currency space can cater these traders, we can easily move the coinmarketcap into the trillions.
If you still doubt the importance of the market maker, please watch this video as it explains how market maker strategies work in general.
