I've been kicking the idea of market making on steem-engine around for a while.
The crux of the whole thing is that a lot of trades are directional. So if you are making a market between BTC and STEEM, at some point you run out of one side of the trade. Then to unwind the whole thing, you have to take funds off steem-engine to restore cash balances back to neutral.
I realized today that is still true, but you don't need to wait. You can arbitrage different exchanges against each other.
So in our BTC-STEEM example, you offer 1 BTC for 32000 STEEM on steem-engine. You receive the 32000 STEEM and then on bittrex or some other exchange, you buy 1 BTC for 30,000 STEEM. The 2000 STEEM difference is your gross profit to cover fees and net profit.
In this scenario, the steem-engine spread will always be a little greater than the bittrex spread plus whatever transaction fees occur in the process. You need a bot that can read market prices, account balances, and execute trades on the external exchange and set prices and quantities on steem-engine.
And spreads should still widen or contract dynamically based on price and volume volatility.
To get spreads as narrow as possible and liquidity as high as possible, steem-engine should refund deposit/withdrawal fees to the market maker and pay a liquidity bonus. So if the market maker transfers in 1 BTC and sells 5 BTC of trades on steem-engine, the maker should get paid 0.01 BTC refund and 0.05 BTC liquidity payment. That eliminates the need for the market maker to make a profit on the actual arbitrage and allows the markets to move in unison.