[In-depth Study of Market Maker Concept]-Steemit Crypto Academy | S4W6 | Homework Post for @reddileep

Edited on Canva

Hello Everyone,

We have another informative lecture Market Maker Concept by professor @reddileep. As we are in crypto week 6th and It’s my pleasure to participate in such a learning task. Professor has explained a very clear and concrete concept. Now I’m submitting my understanding.

We can easily understand a word of market making meaning producing something in the market. Market making plays the main role in liquidity in terms of buying and sells or in other words supply and demand. We can say a market maker is a third party who is ready to provide liquidity in the marketplace by buying and selling. They can be individual traders, institute crypto exchangers.

Let’s understand by example suppose these are two-person A(Seller) and B(Buyer). Person B wants to buy a house. And Person A wants to sell their house. And the problem is here they do not have any idea about the market where to sell/buy. For both the person it’s very difficult to identify the right customer and get a reasonable price. So here now the third party will create a market for both. So Here Person C (Market maker) is the broker who provides the right solution. So, person C will buy a house from A in $X and sell the house to B in $X+profit/brokerage charge.

So, in the crypto market as the process of bid and offer the order through the various trading channel is a market-making process and maintain the liquidity in the market. So, times it’s may get wrong because the moving market price means the risk is also involved. When the order volume is huge that means it’s an active market and the chances are high to get profit whereas if the order volume is less, means inactive market and profit can be negligible.

src

Human has a tendency to see the ongoing market and believe in that, but in reality, that’s not 100% correct. So, the main psychology behind market makers is to get minimal profit difference and make huge money out of that. The reason is as market maker plays a big role for liquidity in term of buy and sell. For example, suppose the market maker creates a busing order for $50 and makes sell price is a profit of 1% that means $50.05. So now a normal trader will place an order between $50 – $50.05. That difference is very less but the reality is Huge profit.

Even the market maker sells 1M daily at the price of $50.03 so the profit will be $30,000. And for traders, it’s easy to get assets at a reasonable price and they also can provide liquidity for their own assets. Market makers give benefits to traders by reducing transaction fees for buy or sell. Using bid-ask spread. But this market making can go reverse too. If they remove their liquidity and decrease the market price.

src

These are the main benefit of market maker concepts.

1. Creates Market Liquidity: For a small trader, it’s very difficult to provide liquidity. And no one wants to take any risk for their asset. So, market maker provides the huge liquidity for trading and make flowless order and match with desired order for trading.

2. Speed up in case of ordering: As there are algorithms behind finding the correct trading price and deliver to traders that they have ordered. So, it’ good for end-user without waiting time and get their order.

3. Sustainable spread: Market makers help traders and make easy and stabilized that provides liquidity. As the busying and selling fee keep low. So that trader gets a fair transaction fee. Which increases trader volume large.

4. Availability: Because of market makers the market liquidity is available 24x7 and that makes faster trading and scalable.

• As the provided liquidity is not permanent it’s for short time. If they remove their asset that can go wrong.

• The price of an asset can be manipulated by the market makers. And that is not good for traders can cause the loss of assets.

• Loss of asset, as a trader, does not have any idea behind the market making. Due to a skewed market for the small traders, it might not properly aware of the market.

There are many indicators for doing technical analysis for the market makers. That help trader to identify the market trend and based on Historic data analysis the market price.

These are the main indicators

• Moving average (MA)
• Exponential moving average (EMA)
• Moving average convergence divergence (MACD)
• Relative strength index (RSI)
• Bollinger bands.
• Stochastic oscillator.

And I’m going to explain MACD and RSI indicators.