Crypto market makers: who quotes both sides
Market makers keep two-sided quotes on crypto venues and earn the spread in return for carrying risk. How the job works, the token loan deals behind many listings, and where wash trading begins.
In 30 seconds
Crypto market makers post buy and sell quotes at the same time, so other traders can always find a counterparty near the current price. They earn the small gap between those quotes, plus fee rebates on some venues, and in return they carry inventory risk and the risk of trading against better-informed counterparties.
What a crypto market maker does
A market maker stands ready to buy at a bid price and sell at an ask price, continuously, for the same trading pair. When a trader sends a market order, a market maker's quote is often what it fills against. That standing offer to trade is what gives a book its liquidity: a visible spread and some depth behind it.
The work is mostly software. Quoting engines recompute a fair value many times a second and post or cancel orders around it.
Crypto adds frictions: venues run around the clock, and funds sit on many exchanges, each a counterparty risk.
How market makers earn the spread
The basic income is spread capture. If a firm quotes a bid at $99.95 and an ask at $100.05 and both sides fill for one unit each, it has bought and sold the same amount and kept $0.10. Small spreads add up, provided the firm is not consistently on the wrong side of price moves.
The second source is the fee schedule. Many exchanges use maker-taker fees: an order that rests in the book and is filled later (the maker) pays a lower fee or receives a rebate, while the order that removes it (the taker) pays more. High-volume makers can earn the rebate on every fill, which lets them quote tighter.
A third source, sometimes larger than both, comes from agreements with token projects, covered below. The table shows how one firm might move its bid and ask over a few minutes in response to its own inventory and to market conditions. Every number is hypothetical.
| Moment | Bid | Ask | Size each side | Reason |
|---|---|---|---|---|
| Calm market, flat inventory | $99.95 | $100.05 | 10 units | Balanced quotes around fair value |
| After buying 30 units | $99.88 | $99.98 | 10 units | Quotes skewed lower to sell inventory |
| News hits, prices jump | $99.70 | $100.30 | 4 units | Wider and smaller to limit adverse selection |
| Position hedged in futures | $99.93 | $100.03 | 10 units | Back near fair value at normal size |
Adverse selection: the risk in every fill
A market maker earns the spread only if the traders it fills against are, on average, uninformed about where the price is heading. When a counterparty knows more, such as an arbitrageur who saw a price move elsewhere a moment earlier, the market maker tends to buy just before the price drops or sell just before it rises. This is adverse selection.
Quoting systems try to detect it. The usual response is to widen the spread, cut size or step back, which is why liquidity can vanish in volatile moments. This is also why large orders are often worked in pieces, routed to dark pools or arranged through an OTC desk.
One quoting cycle of a market maker
- Estimate fair valueCombine prices from several venues and futures markets.
- Post both sidesPlace a bid and an ask around that value.
- Get filledA trade changes the firm's inventory.
- Skew or hedgeShift quotes or offset the position elsewhere.
- RequoteCancel stale orders and post fresh ones.
Inventory risk and hedging
Buy more than it sells and the firm is long the token; sell more and it is short. That inventory sits in many drawers at once: balances on several exchanges, stablecoins from different issuers, positions in futures markets, tokens in wallets waiting to be moved. Each drawer carries price risk and, on centralized venues, the risk that the exchange itself fails.
Firms control inventory in a few standard ways. Quote skew moves both prices so the next trade is more likely to reduce the position, as in the second row of the table above. Hedging offsets exposure elsewhere, often with perpetual futures or on a more liquid venue for the same asset. Limits cap how much of any token the firm will hold; at the limit, the engine stops adding to that side.
The cost of all of this is built into the spread a market maker is willing to quote.
Designated market maker programs
Many exchanges formalize the relationship. A designated or registered market maker program sets obligations: keep quotes on a list of pairs for a minimum share of the time, stay within a maximum spread, and show at least a minimum size on each side. In return the firm receives lower fees or rebates, and sometimes a fixed payment. Obligations usually relax in extreme volatility.
The terms are often private, so outsiders cannot tell whether a tight spread reflects open competition or one contracted firm meeting targets. These questions sit close to the concerns that best execution rules address in regulated securities markets.
Token project deals: loans and call options
New tokens need liquidity, and projects often pay for it. A common structure combines a token loan with a call option. The project lends the market maker a quantity of tokens to use as inventory. At the end of the term the market maker either returns the tokens or buys them at a strike price set in advance.
A worked example, with hypothetical numbers: a project lends 2,000,000 tokens for 12 months with a strike of $0.50. If the token trades at $0.80 at expiry, the market maker exercises, pays $1,000,000 and holds tokens worth $1,600,000. If it trades at $0.30, the firm returns the tokens and owes nothing for the option.
Where the conflicts lie
The option pays off when the price ends above the strike, not for steady quoting, so the market maker's incentives and the project's can diverge. Borrowed tokens can also be sold early, pushing the price down, then bought back cheaper or returned. Public disclosure of such loans is rare. Terms that guarantee trading volume, rather than quote quality, are a warning sign: volume targets are where market making can slide into manipulation.
Wash trading and why regulated markets ban it
Wash trades inflate reported volume and can draw in traders who read it as genuine interest. In regulated markets this is market manipulation. In the United States, Section 9(a)(1) of the Securities Exchange Act prohibits wash sales and matched orders entered to create a false or misleading appearance of active trading in a security, and Section 4c of the Commodity Exchange Act bans wash trades in commodity futures. In the European Union, MiCA's market abuse provisions prohibit market manipulation in crypto-assets.
In crypto, detection relies on patterns: trades between linked accounts, volume that moves neither price nor book, and activity that stops when an incentive ends. On-chain, self-trades between wallets controlled by one party can often be traced.
AMMs: market making by formula
An automated market maker does the same job without a firm behind the quotes. A smart contract holds a pool of two tokens and prices every trade from the ratio of its reserves, so it always quotes both sides. Liquidity providers supply the reserves and earn the fees.
An AMM cannot detect adverse selection or widen its quote when news breaks. Arbitrageurs who know the new price trade against it first, a cost borne by liquidity providers, who also face impermanent loss. Professional firms still take part on-chain, as active providers and arbitrageurs on decentralized exchanges.
Short answers
Crypto market maker FAQ
What does a market maker do in crypto?
A market maker in crypto posts buy and sell quotes for a trading pair at the same time and keeps them updated, so other traders can trade immediately near the current price. It earns the spread between its bid and ask, and sometimes fee rebates, while managing the risk of the tokens it accumulates.
How do crypto market makers make money?
Crypto market makers earn mainly from the spread, buying at the bid and selling at the ask many times over, and from maker rebates on some exchanges. Some also earn from token loan and call option deals with token projects, which pay off if the price ends above a set strike.
What is a token loan and call option deal?
In a token loan and call option deal, a token project lends tokens to a market maker to use as inventory for quoting. At the end of the term, the market maker returns the tokens or buys them at a preset strike price. The option gains value above the strike, which can pull incentives away from steady, fair quoting.
Is wash trading illegal?
Wash trading is a form of market manipulation and is prohibited in regulated markets. In the United States, the Securities Exchange Act bans wash sales in securities and the Commodity Exchange Act bans wash trades in futures. In the European Union, MiCA prohibits market manipulation in crypto-assets. How a law applies depends on the asset and jurisdiction.
What is adverse selection for a market maker?
Adverse selection is the risk that a market maker trades with someone who knows more about the next price move. The market maker then buys just before the price falls or sells just before it rises. To protect themselves, market makers widen spreads, show smaller sizes or pull quotes when flow looks informed.
Is an automated market maker the same as a market maker?
An automated market maker performs the same function as a market maker, quoting both sides at all times, but it uses a formula in a smart contract instead of a trading firm. Unlike a trading firm, it cannot widen its quotes when it senses risk, so its liquidity providers bear that cost.
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