Market Making 101
Ever wondered how you can instantly buy or sell a stock or a crypto token at the click of a button? The answer lies in an often-overlooked player in financial markets: the market maker.
The Basics: Every Trade Needs Two Sides
Here’s something that surprises many people: when you buy a stock on Robinhood or a token on a crypto exchange, you’re not buying it from “the market” or “the exchange.” You’re buying it from another person or entity that’s willing to sell at that exact moment.
Think about it this way: if you want to buy 100 shares at $50, someone must be ready to sell you 100 shares at $50. But what if there’s no seller available right when you want to buy? Or what if the only seller wants $55?
This is where market makers come in.
A Brief History: From Trading Floors to Algorithms
Before electronic trading, markets were loud, crowded rooms filled with people shouting prices across the floor. Liquidity, the ability for buyers and sellers to transact quickly at fair prices, was provided by human market makers, often called specialists or floor traders.
They stood between buyers and sellers, quoting the prices at which they were willing to buy (the bid) and sell (the ask). Their job was simple but vital: keep the market moving. If a buyer showed up without a seller, the market maker sold to them. If a seller wanted out and no buyer was present, the market maker bought from them.
As markets became electronic, humans stepped aside and liquidity provision was automated. But the underlying principle never changed: markets only work when someone ensures there is always a buyer and always a seller.
What Does a Market Maker Actually Do?
A market maker is a firm or individual that stands ready to buy and sell an asset at publicly quoted prices. When you want to buy, the market maker sells to you. When you want to sell, the market maker buys from you. This creates liquidity without causing dramatic price swings.
A simple analogy is the currency exchange counter at an airport. You can buy or sell foreign currency instantly, but at a spread: they buy at one price and sell at another. That difference is their fee for always being ready to transact.
Crypto exchanges operate the same way just faster, more volatile, and around the clock.
Understanding the Order Book
To understand market making, you need to understand the order book: a real-time list of all buy and sell orders for an asset, organized by price.
The order book has two sides:
- Bids: orders to buy (demand)
- Asks: orders to sell (supply)
The difference between the highest bid and the lowest ask is the spread. A healthy market has orders stacked at many price levels, creating “depth”—and depth matters far more than most people realize.
Why Do Market Makers Do It? Capturing the Spread
Market makers aren’t doing charity, they’re running a business. Their profit comes from capturing the spread.
Example:
- Market maker bids Bitcoin at $42,000
- Market maker offers Bitcoin at $42,010
- Spread = $10
If someone buys at $42,010 and someone else sells at $42,000, the market maker earns $10. Multiply that by thousands of trades per day and you see the business model.
A critical challenge is inventory risk, avoiding being stuck with too much of an asset that’s dropping or being short an asset that’s rising.
When Liquidity Goes Wrong: Real Examples
History is full of moments where poor liquidity triggered chaos. These examples show why liquidity isn’t a luxury, it’s critical infrastructure.
The 2010 Flash Crash
A large automated sell order hit an unusually shallow order book. Liquidity evaporated within minutes, sending the Dow Jones plunging nearly 1,000 points before rebounding. The issue wasn’t the asset, it was that the order book simply couldn’t absorb the selling pressure.
Crypto’s “Altcoin Crashes”
In early crypto markets, countless tokens saw 40–60% drops in mere seconds when a single whale sold into an empty order book. The long-term damage wasn’t due to bad fundamentals, it was the absence of liquidity infrastructure.
These aren’t edge cases. This is what happens when projects underestimate the importance of deep, reliable liquidity.
The Problem With Shallow Liquidity
Here’s a truth many projects learn too late: not all market making is created equal.
Many firms provide what looks like liquidity but disappears the moment markets get active. Warning signs include:
- Tight spreads with almost no real depth
- Orders that vanish during volatility
- Support levels that collapse when meaningful size hits the book
- One-sided liquidity that favors the firm, not the project
Projects often pay high retainers for liquidity that only simulates activity instead of supporting the market when it matters. The result is poor investor experience, unstable price structure, and a lack of confidence from serious buyers.
Why Deep Liquidity Matters for Crypto Projects
For smaller crypto projects, the stakes are especially high. Without sufficient depth:
- A single large sell can drop the price 20%+, triggering panic and long-term damage to investor confidence.
- Serious investors stay away; whales and institutions evaluate depth before entering any position.
- Growth becomes painful, more users and more trading demand lead to higher slippage and frustrated holders.
Deep liquidity turns your token from a risky, thinly traded asset into something serious capital can enter and exit without moving the market.
The Bottom Line
Liquidity isn’t just an exchange requirement, it’s the foundation of a healthy market. It shapes investor trust, market stability, price behavior, and your project’s overall credibility.
Market makers are the infrastructure that makes instant trading possible, stabilizes prices, deepens order books, and makes markets safer and more efficient for everyone.
For crypto projects, choosing the right liquidity provider isn’t about making the chart look good today. It’s about building resilient markets that can support long-term growth and attract strategic capital.
With deep, adaptive, and reliable liquidity, your token becomes easier to trade, more stable, and more attractive to both retail traders and institutional partners.
If your goal is to build a strong, healthy ecosystem around your token, liquidity is where that journey begins.
Contact us to learn more