In-depth Study of Market Maker Concept]-Steemit Crypto Academy | S4W6 | Homework Post for @reddileep
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1-Define the concept of Market Making in your own words.
In the early 1900, the first market makers’ job was to make a market in a single stock, the market maker offers a product for $10 and sells it for $12 and the market maker will just maintain those buy and sell offers throughout the day, hoping that more traders come in and get those his offers. If the price moves up he might offer to buy at 11 dollars and sell at $13, he constantly adjusted the offer as the day went on.
One day all the market makers decided to leave the street and go indoors and they formed a club, they all have seats. SO each individual will market make for a particular product, and that firm became the new york stock exchange.
As the years went by it evolved from people to machines, machines were placing orders on order books, adjusting them automatically as the market moves they profit from the spread. They were just doing the same thing buying low and selling high.
In Crypto, because there are thousands of exchanges, all of them make available the APIs, publicly available, everybody has the access to the market directly and we all can be market maker. Market making opens a whole new world of trading that was never possible on equity before.
When someone wants to buy or sell a cryptocurrency coin, an exchange platform is highly needed for this to be achieved, An exchange is a place where buyers and sellers meet, an example is the binance, the price at which traders can buy or sell depends totally, on the supply and demand of the coin, which is similar to buy and to sell.
So the group of people or organization bring out large liquidity and depth for the market. The liquidity that is provided by those sets of people is large enough to hold the market and keep the market moving continuously. This person is known as Market Makers. They normally check for the Bid-ask price of the coin and buy at a lower rate and sell at a higher, the difference between the asking price and the bid price is known as Spread.
The Market maker's liquidity creates a large volume around the region where both trades are made and they also determine the price of the asset by the liquidity. They look for the best bid price to buy and sell also at the best ask price. Their profit is made from the difference between the bid and the asking price which is known as the spread. For instance, you buy at a bid price of $200 and sell at the asking price of $230, the profit that was made is $30 which occurs due to the spread.
2-Explain the psychology behind Market Maker. (Screenshot Required)
A Market maker is there to provide Liquidity for people at all times. If you become a registered member of the Market maker in the Crypto space, what you are saying is that you will buy or sell that particular coin, so any member of the public can come in and buy or sell that coin. Their main job is to provide liquidity in a reasonable size.
Let’s say you buy or sell 2 ETH and immediately place your order. If the Liquidity is high the order will be executed immediately but on the other hand, if the liquidity is low, it might take a lot of time for the order to be executed. This happens because liquidity is needed to trade a larger volume. The Market makers serve as liquidity providers, and the rebate is given to them because they ease trading.
In the chart below, of DOT/BNB, this is the depth of the pair and from this chart, we can see the bid price and the ask and the difference between them which is called spread, from the chart we can see that the Bid price is $30.33 and the asking price is $33.33, the spread is the $3.00. We can notice that the makers at the same time create Buy and sell and then take the $3.00 as it profit and it still provides liquidity
Another physical example or illustration, let's say the market makers have the buy rate of $70 and sell rate at $75. which is also to be the Bid price and the Ask price which are $70 and $75. AN investor sells the asset to the market maker at the rate of $70 and the market maker sells it to another investor at the rate of $75, which made him have a profit of $5 which is the spread. The normal trader is as known as Market takers, They take the liquidity that the market makers have made.
3-Explain the benefits of the Market Maker Concept?
The Market maker concept has a very important role in the markets daily operations and their value can not be underestimated, they have enormous benefits, so below are some importance of market makers.
- They make the asset have more value by increasing the price of the asset. Market maker have the ability to quote high bids price and even high ask price also at the same time. Investors who really need to trade, after looking at good entry opportunity, will have no option to enter the market at any cost. Investors can buy or sell at the price stipulated of the market makers.
- One of the most important benefits of the market makers is to provide Liquidity. Without liquidity, there will be no trade. Because the market will not even move which will make it illiquid. Liquidity also allows small traders to trade. Trading in an illiquid platform is very dangerous, all your money can be lost in the spread alone, so providing liquidity helps to reduce the spread of a market that will further assist the little traders to trade.
- I spoke a little bit about the market takers, the truth is that market makers help the market takers to be able to make useful profit in the market. They normally wait for the time the market makers to enters the market for them to make a quick profit .
- If a particular market has much volume, there is a very high probability that there will be more investors, and most of the times market makers provide liquidity which increases the volume of the market, and in turn, this will lead to more investors coming in to the market.
4-Explain the disadvantages of Market Maker Concept?
There is nothing in this world that has all advantages without disadvantages. The disadvantages are also numerous too and some can be seen below too.
- The cost of being a market maker is too high. Most times you can not use your mouse or your hands to click buy and sell. You need supercomputers and sometimes even bots. And all the computers and BOTs can cause huge sum of money, that market-making can only be done by big firms, banks, some brokers and rich individuals because of the infrastructural cost.
- It takes a lot of money to cause a market to have high liquidity, the fact that you are a market maker does not mean that you will always make profit. There are times that the market can go against you and you will make huge losses too. Imagine if you buy an asset at $4 and before you will sell it, it has reduced to $3.8, this can be a major loss for you as a market maker.
- More market makers present in the space of a particular market reduce the profit of the market makers. Because this will tend to reduce the spread of the market at the time.
- If your market maker is not regulated, they can manipulate the price of the asset and this can lead the investors to make huge losses at the market.
5-Explain any two indicators that are used in the Market Maker Concept and explore them through charts. (Screenshot Required)
Market maker knows how valuable using the technical indicator to help them analyse the market properly. They also consider the psychology of the market, they consider so many other factors before determining where to buy or sell in the market. The use some technical indicators which helps them and such indicator includes RSI, Bollinger Bands, Pivot Points, Moving Averages and some many others.
Moving Averages
The Moving averages can be used to know the direction of the current trend of the market. The Indicator is so widely use to determine a good entry point and even exit points of the market.This indicator is of two types.
- Simple Moving Average
- Exponential Moving Average.
Using the moving avearage helps the market makers to know the trend as I have said earlier, but how can this be achieved. This can be achieved by looking out for crosses of the two Moving averages. And they are ttwo types of the cross which are the Death cross and the golden cross. The golden cross signifies the bullish movement of the price while the death cross signifies the bearish movement of the price.
I will be showing you an example of it. In the illustration, will will be using the 200 moving average has a red color and the 50 moving average which a blue colour.
This chart below of ETHUSD in a 2-hour time frame, we can see where the 200 MA crosses over the 50 Ma which produces a death cross and it signifies a bearish trend.
With the same chart and the same time frame, we also see a situation where the 50MA cross above the 200 MA which is an indication for a bullish trend of the market.
We can see the Moving average can be used to determine a good entry point for the market makers and so many other things.
Relative Strength Index (RSI)
The RSi which measures the market’s momentum is an oscillating technical indicator. It is used by market makers to know points of reversal in the market, it is made up of levels ranging from 0 to 100. It has two key features, which the overbought and the oversold which shows the reversal of the trend. If the range of level is between the 0 - 30 point it is an indication for oversold and it signifies an uptrend momentum but if the range of tthe level is between 70 - 100 it indicates overbought which shows that downtrend momentum is about to happen.
The chart above, BNBUSDT in a 2 hour time frame show you when the RSI was over-bought and it shows how it reverses downward and also when the price was at the oversold level of the RSI and how the price reverses and formed a bullish trend .
These are simple way the market makers uses to explore the market and locate useful opportunity and execute trade that yield profits to them.
The Market makers are highly importantt to the crypto market or there will be no trade because there will be no liquidity. ANd the beautiful thing aboot being a market maker is that you huge profits and also help the small investors to make their profit. Most of the times the Market makers uses Computers to achieve this .
Cc: @reddileep