Understanding Cryptocurrency Exchanges and the Role of Market Makers
Learn how market makers keep crypto markets liquid, stable, and efficient. Explore their impact on reducing price swings, supporting fair prices, and managing trading risks.
Quick answer: Crypto market making means constantly placing buy and sell orders for a token on a crypto exchange, so there is always someone to trade with. Market makers earn the small gap between the buy and sell price (the spread). In return, traders get faster trades, tighter prices and fewer sudden price jumps. Exchanges and token projects often hire market makers to keep their markets liquid.
What is crypto market making?
A crypto market maker is a firm or trader that quotes both a buy price (the bid) and a sell price (the ask) for a token at the same time, all day. Because their orders are always sitting in the order book, anyone who wants to trade can do so instantly. That is what traders mean by liquidity.
Without market makers, many tokens would have few buyers and sellers at any moment. Trades would take longer, and a single large order could move the price a lot (this is called slippage).
How crypto market making works: a simple example
Say a token trades around $100. A market maker places:
- a bid to buy at $99.90
- an ask to sell at $100.10
When a trader sells to the market maker at $99.90 and another buys from it at $100.10, the market maker keeps the $0.20 spread. Repeated thousands of times a day across many tokens and exchanges, those small spreads add up. Market makers use algorithms to update prices every second and to manage inventory risk, the risk that the price moves against the tokens they're holding.
Market making on crypto exchanges
Every centralized crypto exchange needs market makers. Without them, order books would be thin, spreads would be wide, and traders would leave for a platform where their orders fill instantly. That's why exchange market making is usually a formal arrangement:
- Exchange market maker programs: the exchange gives selected firms lower or even negative fees (rebates) in return for keeping tight spreads and deep order books.
- Maker-taker fees: orders that sit in the order book (makers) usually pay less than orders that fill right away (takers). This rewards anyone who adds liquidity.
- Listing requirements: many exchanges expect a new token to have a market maker in place before or at listing.
- Performance targets: exchanges and projects track the spread, order book depth near the price, and uptime (how much of the day the market maker is quoting).
| What exchanges measure | What it means |
|---|---|
| Spread | The gap between the best buy and sell price. Smaller is better. |
| Depth | How much can be bought or sold near the current price without moving it. |
| Uptime | The share of the day the market maker keeps quotes live. |
| Volume quality | Real trades between different parties, not wash trading. |
Volumes and price swings often jump around big events like the next bitcoin halving, which is exactly when good market makers earn their fees and weak ones disappear. Track it with our live countdown.
Who are the market makers in crypto?
- Specialist trading firms that make markets on many exchanges, often with high-frequency trading systems
- Exchange market maker programs: exchanges recruit market makers and offer lower fees or rebates in return for keeping spreads tight
- Market makers hired by token projects to give a new token enough liquidity after it lists
- Automated market makers (AMMs) in DeFi, where smart contracts and liquidity pools (for example, Uniswap) set prices instead of a firm
| Traditional market maker | Automated market maker (AMM) | |
|---|---|---|
| Where | Centralized exchanges (order books) | Decentralized exchanges (liquidity pools) |
| Who sets prices | The firm's algorithms | A formula in a smart contract |
| Who provides the tokens | The market maker | Liquidity providers who deposit into the pool |
How token projects work with market makers
Projects launching a token usually pick one of two common arrangements. Terms vary a lot, so read every contract carefully:
- Retainer model: the project pays a monthly fee and provides the tokens (and sometimes cash) the market maker trades with.
- Loan + option model: the market maker borrows tokens from the project and gets an option to buy them later at a set price. This costs less upfront, but it can give the market maker reasons to act against the project's interests.
How to choose a crypto market maker (and red flags)
Look for:
- clear, regular reporting on spread, order book depth and uptime
- a known, identifiable company that completes KYC and signs a proper contract
- written rules that ban wash trading and other manipulation
- fair, clearly explained option or fee terms
Red flags:
- promises to "pump" the price or guarantee returns
- offers to inflate trading volume
- an anonymous team, or refusal to complete KYC
- vague contracts or no reporting
Compliance and market manipulation risks
Real market making is legal and useful. But wash trading (trading with yourself to fake volume) and spoofing (placing orders you never mean to fill) are market manipulation. Regulators in the US and elsewhere have charged firms whose "market making" was really fake volume.
For exchanges and token projects, that means:
- run KYC and due diligence on every market maker you work with
- monitor trading for self-trading, layering and other manipulation patterns
- for Canadian platforms, follow FINTRAC's AML rules and the CSA's crypto trading platform requirements
See our guides to crypto exchange and VASP rules and transaction monitoring for crypto exchanges, or our token due diligence service.
Frequently asked questions
What is crypto market making?
Constantly quoting buy and sell prices for a token on an exchange so traders can always trade. Market makers earn the spread between those prices.
Who are the market makers in crypto?
Specialist trading firms, firms in exchange market maker programs, market makers hired by token projects, and automated market makers (AMMs) in DeFi.
How do crypto market makers make money?
Mainly from the spread between their buy and sell prices, plus fee rebates from exchanges and, in some deals, fees or token options from projects.
Is crypto market making legal?
Yes. Genuine market making is legal. Wash trading, spoofing and other ways of faking volume or prices are market manipulation and are illegal in many countries.
What's the difference between a market maker and a market taker?
A maker places orders that wait in the order book, adding liquidity. A taker places orders that fill right away against existing orders, removing liquidity. Exchanges often charge makers lower fees.
How do I choose a market maker for my token?
Pick a known, KYC'd firm with clear reporting and fair terms, and avoid anyone who promises price pumps or guaranteed volume.
AML Incubator helps crypto exchanges, token projects and VASPs with compliance, KYC and due diligence, including checks on the firms they work with.
