Market makers are actually not a new role; I recently realized how long their history goes back. Tracing back, this concept appeared as early as the 18th century, when the London Stock Exchange already had people acting as intermediaries, providing quotes for buyers and sellers, and incidentally adding liquidity to the exchange. Interestingly, the same function is called different names in different places: the NYSE calls them "Specialists," while the Hong Kong Stock Exchange refers to them as "Dealers."

Ultimately, market makers are the people who create the market. With buy and sell orders present, the market comes alive. This role can be filled by large institutions, individual traders, or even some exchanges themselves. However, in an era where financial roles are highly specialized, the market-making work on mainstream exchanges is mostly handled by large institutions.

The core work of market makers actually boils down to two main tasks. First is providing two-way quotes. They post both buy and sell orders on the platform, earning profit from maintaining the bid-ask spread. This spread is essentially the fee for providing liquidity, in other words, an intermediary fee. Second is managing the depth of the order book. They need to place multiple orders at different price levels to give the market sufficient trading depth. As market conditions change, they must also adjust the positions and sizes of these orders in real time, which requires very quick reactions.

An order book is essentially a collection of buy and sell orders. Buy orders are arranged from high to low, and sell orders from low to high. The difference between the two is the profit margin for the market maker. In markets with good liquidity, this spread is very small, making trading very smooth. That’s why large exchanges often provide dedicated trading interfaces for market makers, enabling them to execute high-frequency market-making strategies—mainly to keep the spread within an ideal range.

When a new token is listed, the role of market makers becomes even more critical. They help new projects establish a stable trading environment and facilitate price discovery. Cooperation between both parties usually involves several aspects: clearly defining what specific services the market maker will provide, such as opening price setting, liquidity support, and order book maintenance; then the fee structure, which may include fixed fees, token options, or performance bonuses; the duration of the partnership and termination conditions; the scope of risk sharing; and finally, agreements on data confidentiality and information protection.

However, market makers are not always guaranteed profits. During sharp market fluctuations, their quotes can suddenly become unfavorable. Sometimes liquidity can dry up unexpectedly, making it impossible to buy or sell at the expected prices. If the counterparty has insider information that they don’t share, it can also lead to losses. There’s also the risk of counterparty default— even if your judgment is correct, you can suffer losses if the trading partner breaches the agreement. The extreme market conditions during Luna’s crash serve as a textbook example—many market makers suffered heavy losses at that time.

In the crypto space, several well-known market makers are worth paying attention to. Jump Trading is a veteran, established in 1999, with a deep background in traditional finance, and later quickly shifted to crypto, known for its speed and precision in trading systems. Wintermute is relatively young, founded in 2017, but has grown rapidly, renowned for its advanced algorithmic trading systems and extensive ecosystem collaborations. GSR Markets has been active since 2013 in global crypto markets, specializing in providing complex trading solutions and liquidity services. There’s also DWF Labs, founded in June 2022, claiming to be one of the world’s leading market makers, with a somewhat unique style—besides market making, they also participate in investments, involving well-known projects like Mask, YGG, and TON.

Overall, understanding the role of market makers is very helpful for grasping how trading markets operate. Although they are invisible and intangible, they are the behind-the-scenes heroes maintaining market liquidity and reducing trading costs.