Market Maker

What Is a Market Maker?

In trading, a market maker is an individual or institution that provides liquidity to the market by constantly offering to buy and sell an asset, like stocks or cryptocurrencies. By doing this, they help keep trades flowing smoothly, ensuring there’s always someone available to buy or sell, even in volatile conditions.

How It Works

1. Two Sides: A market maker places both buy and sell orders for an asset, typically at slightly different prices. This creates a "spread" (the difference between the buy and sell prices), which they profit from. On Ouinex the spreads are incredibly low, and you see them in real time as you trade.
2. Maintaining Liquidity: By being ready to buy or sell at any moment, market makers reduce the likelihood of large price swings and make it easier for individual traders to enter or exit trades at predictable prices.
3. Profit Mechanism: They earn by buying slightly below the market price and selling slightly above it. This small margin, multiplied across many trades, makes for consistent profit.

Example Use

Imagine a market maker working with a stock trading at $100. They might set up buy orders at $99.95 and sell orders at $100.05. When someone buys at $100.05 or sells at $99.95, the market maker pockets the 10-cent difference, or share it with the trading platform. Unfortunately, most platforms don’t show their spreads in real-time and traders are unaware of this hidden cost of trading.

Making and Taking Prices

On crypto trading platforms at large, market makers can both make and take prices. Which means retail traders (i.e. the everyday traders) are competing against market makers with big teams of people, millions of dollars of available cash, and tech trading tools that are so advanced the everyday trader can only dream of using them. This puts market makers at an unfair advantage.

What Are Makers and Takers?

The terms maker and taker refer to two types of trades that happen in the order book of an exchange.

1. Maker: A trader is a "maker" when they place an order that adds liquidity to the market. This happens when you set a buy or sell order that isn't immediately matched with an existing order (e.g., setting a limit order to buy Bitcoin at a lower price than it's currently trading). Your order "sits" in the order book, waiting to be matched with someone else's order. By doing this, you're making the market, hence the name "maker."
2. Taker: A trader is a "taker" when they place an order that removes liquidity from the market. This happens when you place an order that matches with an existing one in the order book (e.g., you buy Bitcoin at the market price, instantly matching with someone selling at that price). You’re "taking" the price that’s already set by someone else.

In short, makers create orders that help stabilize the market by adding liquidity, while takers fill those orders, reducing liquidity by completing trades instantly.

Key Takeaways

• Market Makers help stabilize markets by constantly providing buy and sell orders.
• Profit from the Spread: They make money on the spread, the small difference between buying and selling prices.
• Keeps Markets Liquid: Their activity ensures trades can happen quickly and with minimal price fluctuations.

In short, market makers are like the "traffic controllers" of trading, keeping trades moving smoothly by always being ready to buy or sell and earning a small profit on each transaction.