Market making is a process to unite all sellers and buyers in creating a digital asset market, stocks, and other securities. Market makers have done this but led to inconsistent market pricing.
However, with the advent of automated market making (AMM) in the 1990s, it became one of the protocols in all crypto and fiat currency exchanges.
Whereas in traditional markets, AMM imitates the manual process of broadcasting market orders to exchange platforms. For more details, we will provide some useful information related to market marking for you.
What is Market Making?
Market making is the process of bringing together sellers and buyers to create a stock market or other securities. Market makers are high-volume investors who can create a market because they can sell and buy assets simultaneously.
Because of this, the working principle of market marking is to sell and buy your assets, even though there are no natural sellers or buyers. This is what makes market-making into sellers and buyers a last resort.
Because there are no sellers and buyers, it is these investors who seek profit through the difference between the bid and ask prices. These investors also gain by providing liquidity services to more important and broader markets.
Meanwhile, liquidity indicated as the mark of easiness with which an asset can be sold and bought without causing the effect to price stability. This is the reason why many people choose liquidity in search of profit.
Liquidity Services and Market Makers
Liquidity can benefit many stakeholders as long as it is adequate. This is because liquidity can help to make further efficiency to a financial markets by reducing price volatility and also supporting the establishment of reasonable selling prices.
Meanwhile, liquidity itself depends on order books, which are a collection of orders from sellers and buyers for a particular market. While the difference between the lowest selling price and the bid price can be referred to as the bid-ask-spread.
In the liquidity market itself, the bid-ask spread is often quite wide and shows a fairly low volume. However, more liquid markets often have bid-ask spreads that tend to be tighter and have high volumes.
It is because of this that market makers must facilitate market liquidity by posting tighter spreads. Even market makers must continue to monitor and be active in posting spreads on the liquidity market.
Who Makes the Market?
Once you know the role of market making, then you need to understand who is behind the market maker. In today’s world, the ease and speed of trading stocks will continue to increase.
Especially with the emergence of various stock trading applications that make it easier for many people to buy and sell stocks. With this application platform, all users can trade every day even in seconds.
But behind the ease of stock trading, it is the market making that must ensure that this entire process must occur efficiently and smoothly. So a common and easily recognizable market maker is a brokerage house.
The brokerage house will serve the buying and selling to all investors. With this broker, market making can keep financial markets liquid and can generate profits for them.
Read also : What Is an Automated Market Maker?
About AMM (Automated Market Makers)
Market makers are the figures behind the ease of trading stocks only through applications. This shows that this luxury can only be obtained today.
In the past, market makers did not have the luxury of using automation technology to create liquidity markets. It wasn’t until the 1990s that these market makers created the AMM created by ATD and Shearson Lehman Brothers.
Before creating AMM, they used to order books which are trading products that are used manually to increase market liquidity.
While this manual approach to market creation causes a lot of price discovery latency and slippage. Meanwhile, the lack of price transparency has led to many accusations of market manipulation.
Because order books are a collection of buy and sell orders in a liquidity market, due to the lack of transparency, accusations of market manipulation arise from various directions.
AMM emerged and succeeded in solving this problem by removing people from participating in the market-making process. AMM also allows for instant, easy trading and greater transparency.
So it can be concluded that AMM is a solution in the early 1990s which is still used in liquidity. AMM minimizes human work because of the many allegations of market manipulation.
AMM that works with this automatic machine will work according to orders and humans cannot interfere in AMM’s job to make the market. It is these investors who have given the task to AMM.
Creating a Decentralized Market
AMM or automated market makers have grown in popularity in recent years, especially on decentralized cryptocurrency exchanges or DEXs. This is where the order books are replaced with liquidity pools that have two different cryptocurrencies.
When on DEX, AMM charges different prices simultaneously between two digital assets. Almost anyone can participate in becoming market makers by providing liquidity to certain groups.
These liquidity providers will earn income from the funds they save. These earnings will be commensurate with the liquidity they provide to the pool.
Institutional Investing and Crypto Market Making
With the development of technology, market makers have become a very important and increasingly widespread aspect of the cryptocurrency industry. By increasing the quantity and quality of crypto markets that can provide liquidity via GEX or centralized exchanges.
It serves to become an important standard of measurement of the crypto industry and makes a considerable contribution to institutional investors.
The main benefit of market makers is to reduce slippage and volatility. And this will extend to retail investors who typically deal in smaller orders and their interests are based on investment banks, hedge funds, and so on.
The cryptocurrency industry is getting bigger because of AMM and many people are trusting this technology more in stock investing. Of course, AMM has gone through various obstacles and difficulties to have a very large role in market making.
This is why now you can feel all the convenience in trading stocks and other liquidity.