The market maker is not a mythical puppeteer who manipulates the market at will.
A market maker is a legal entity that has made an agreement with the exchange to maintain asset prices, and whose main task is to provide liquidity. Market makers are an integral part of the financial markets and are present on trusted trading platforms. EXMO Margin also has them. Due to their presence, traders can open positions without fear of moving the price too much when using a market order. You can also be sure that stop orders are executed without strong slippage.
Market maker as a price regulator
A market maker can maintain quotes simultaneously in the direction of purchases and in the direction of sales on one financial instrument. This ensures smooth price movement and eliminates gaps.
When you watch a quote that shows limit orders for sellers and buyers, you can be sure that there are market-maker orders among them. If they removed their limit orders, the quote would become naked, there would be levels at which there were no applications, and this would lead to large gaps in the price chart, as well as huge squeezes, and it would become much easier for large players to manipulate the market. They would be able to destroy traders with small or medium deposits.
Benefits for market makers
Besides the fact that market makers see more than other traders, they have other advantages:
Reduced commissions – in some cases, the market maker pays less. But this rarely happens.
Zero commissions are a popular offer for market makers. This arrangement encourages them to create large bids.
Negative commissions – the exchange pays a part of the commission to the market maker. This option is available to large and trusted companies.
The income of a market maker is a salary from the exchange, despite the fact that it receives all requests for the purchase and sale of assets from other participants. Regular traders can view limit orders in a quote, but a market maker sees even more – pending stop loss and take profit orders.
Myths created by traders about market makers
There are many myths about forced closing providers in the crypto community. Let’s look at the most popular ones.
Myth 1: The market maker manipulates pricing
Manipulation in financial markets is a criminal offense. For example, in the United States, you can get several life sentences for this, and in China, the death penalty awaits a fraudster.
Myth 2: The market maker “harvests” stop levels
Among beginners and experienced traders, you can often hear a similar expression. This usually happens during high volatility (for example, during news releases), when critical price levels are broken out. At moments when the price goes rapidly in one direction, but then a market reversal occurs and the price goes in the opposite direction, the traders say, “Oh, fine. That’s the market maker targeting my stops”
In reality, market makers do not trade in these situations. When important news is released, regulators allow them to exit the market in order to avoid huge losses. The market is left unattended and chaos ensues. Situations when the price behaves inadequately are familiar to everyone. Large players and traders remain on the market, creating this chaos.
Finding out when a market maker is present on the market is very simple – the spread is as narrow as possible. The habitat of a market maker is consolidation movements or flats. It is in the apartment that the market maker feels comfortable and earns.
Myth 3: Market makers always trade in the direction opposite to that of the market
In reality, the market makers place orders opposite to the market trend, but only to supply enough forced closing so that the buyers and sellers can transact in the market. Otherwise, traders could wait long enough for their trade to be executed.
You have to understand that the market makers are many – there are hundreds, even thousands of them. Therefore, in a stop-hunting attempt, a market maker may face a larger speculative trader, or several of them, who can easily force the market marker out of their position, losing all their equity. All in all, this strategy may be too risky in certain situations.
Conclusion
The activity of market makers is necessary for the exchange to maintain bid/offer prices or trading volume. Nobody needs empty quotes.
Market makers don’t manipulate the market or try to deceive traders. What they do is a complex and risky undertaking that can deprive them of their capital and licenses. Market makers are an integral and important part of financial markets, which means that you should not treat them as opponents or blame them for mispricing.
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