Market makers: who provides liquidity and why
Market makers keep buy and sell orders on both sides of the book. How they earn, what risks they take and why markets need them.
When you place a market order, someone must already be waiting on the other side. Much of that waiting liquidity comes from market makers.
What a market maker does
A market maker continuously places buy orders slightly below the market price and sell orders slightly above it. When others trade against both sides, the market maker earns the difference — the spread — and often a maker fee rebate from the exchange.
The risks they manage
- Inventory risk: after many buyers hit its asks, a market maker holds less of the coin than intended (or more, after sellers). If the price then moves, it can lose more than the spreads earned.
- Adverse selection: traders with better information pick off stale quotes before the market maker can update them.
- Technical risk: fast markets require fast systems.
To manage this, market makers adjust prices quickly, hedge on other exchanges or in futures, and widen spreads when volatility rises.
Why markets need them
- Narrow spreads lower trading costs for everyone.
- Deep order books reduce slippage for large orders.
- New or small coins often have little liquidity until market makers support them.
Liquidity can disappear
During sudden moves, market makers may pull orders to avoid losses. The order book thins out exactly when many people want to trade — one reason why prices can jump sharply. See Liquidation cascades.
On decentralised exchanges
On AMM-based exchanges, liquidity providers play a similar role by depositing tokens into pools. Read DEXs, AMMs and liquidity pools.
Blog posts are for education and information only and are not investment, legal or tax advice.