Compared to traditional financial markets, the cryptocurrency market is relatively new and known for its high volatility. However, thousands of tokens are looking to thrive in a highly competitive market. Many good token projects are facing problems with liquidity, low trading activity, high slippage, and wide bid-ask spreads. Moreover, if your token is not in the top-15, you probably need help with liquidity at least for certain exchanges or pairs.
In order to overcome the liquidity problem token projects partner with market makers, who play a crucial role in ensuring market efficiency. Market makers act as an intermediary between a buyer and a seller, quoting both parties the price of the token. As a result of the market maker’s job, a token has higher trading volumes and a tight spread across exchanges and different pairs.
Understanding why you need a market maker is just the first step, but how do you choose the right liquidity partner? What is important to consider when selecting a market maker?
Let’s take a deep dive into it and find out!
What you should look at when choosing a market maker
1. Experience and Track Record of the Team
Market making requires bespoke technology solutions, algorithm development, and risk management policies. The algorithms need to handle challenges such as stale data, trade execution lag, as well as API downtime and errors. The best crypto market makers have proprietary software and algorithms, development teams, and professional traders with years of industry experience.
In a specific market like crypto, finding a partner who walked in your shoes could be even more beneficial. If the market maker’s team had been on your side and issued tokens, or maybe worked for crypto exchanges, they can bring very valuable expertise to fuel your token.
Before committing to the deal, make sure that a market maker has an experienced team and a proven track record.
2. Pricing & Business Model
Although the actual fees for market-making services may vary case by case - the pricing structure and incentives model is something to keep in mind when selecting a market maker. Paying for market-making with options on the native token can seem attractive at first but can set a wrong incentive structure. Ensure that a market maker is incentivized to deliver a good liquidity service, instead of pumping the token and selling it immediately for a profit.
3. Connectivity to exchanges
Whether your token is already listed or just planning to, it is good to partner with a market maker who works with many exchanges, can help you get listed, and will support you through the onboarding process. Leading market makers have a vast network of partner exchanges.
4. Operating Model and Control Over the Assets
The inventory is the number of native tokens and denominated assets (e.g. your digital asset in ETH, BTC, or USD) that are available to be put in the order book by the market maker. Inventory is usually provided by the token issuer either in a managed account on the exchange, or by lending the inventory to the market maker. The first option is preferable, as tokens are held on your account within the exchange and the market maker only has trading access to that account. The more control you maintain over your inventory the safer it is for you.
5. Providing the service whatever the market climate
The ability of a market maker to consistently provide a reliable service, even during the most volatile market conditions, may be crucial. Professional market makers are able to provide liquidity and are willing to support trading at different conditions, considering the rapidly changing market sentiment, and for both liquid and highly illiquid tokens.
6. Regulation and Compliance
The crypto market is rapidly becoming a regulated financial space. Market makers as financial intermediaries must be regulated in the jurisdiction where the company is registered. This helps to ensure that they are operating under the market standards, comply with given regulatory frameworks and AML procedures, and stay away from shady operations. A proper market maker will require you to go through KYC and not engage in illegal activities such as wash trading.
Market makers must be accountable and able to provide transparent fee structure, clear communication, and detailed reporting.
Selecting the right market-maker for your token can be complicated.
We hope that this guide will help many projects on their path to a liquid and efficient market for their token.
flovtec is an award-winning Swiss market maker offering solutions to tokens, protocols, and digital asset exchanges to create a liquid and efficient market.
We have developed fully automated market-making algorithms and provide liquidity even to highly illiquid tokens. We professionally manage risks and structure our products to ensure the safety of our clients and their capital.
We have built connectivity to 120 crypto exchanges, including the Top 20 most liquid ones. Aside from market-making, we support our clients during listing and onboarding on the exchange.
At flovtec we offer a non-custodial solution for inventory. Your digital assets are always held in your account at the exchange. We connect to your account using API, which allows us to run our market-making algorithms on the digital assets held on the account. You always stay in full control of the inventory, while our algorithms ensure tight spreads, deep order books, and an overall liquid market for the token.
Our communication, reporting, and pricing are transparent. We clearly define the goals of our agreements and align incentives for mutual success.
flovtec is regulated by financial authorities in Switzerland and adheres to the Swiss AML act.
In the end, we believe that the outstanding technology coupled with the expertise of the team is the optimal blend that allows the market maker to offer excellent service to its clients.
The information on the internet pages of flov technologies AG is only addressed to professional and institutional clients according to art. 4 para. 3 and 4 of the Financial Services Act. These internet pages might contain information on services and collective investment schemes as well as other investment products that are not registered with FINMA in Switzerland and that will only be available to professional and institutional clients.
Please note, that the contained information is for information purposes only and does not constitute an offer for any financial instrument or is aimed to sell any financial instrument. None of the contained information constitutes investment advice or a recommendation for an investment.