What is a Market Maker (MM)? The difference between MM and AMM - Market247.io

In this article, Market247.io will answer the question of “what is a Market Maker (MM)?” and the difference between Market Maker and Automated Market Maker (AMM) - Two concepts make many newbies confused when entering the crypto market.

1. What is a Market Maker (MM)?

Market Maker (MM) is a crucial component of the cryptocurrency market, which has the power to control the pricing of currencies on exchanges. So what is a Market Maker (MM) that has such power?

1.1. What is a Market Maker on Cryptocurrency?

In the traditional financial markets, Market Makers (MM) are individuals or brokerage firms that provide trading & liquidity creation services. Market Makers (MM) directly participate in transactions as both sellers and buyers.

1.2. What is a Market Maker - Who are they?

Market makers can either be broker-dealers or individuals who meet a certain set of requirements around education, training, capital adequacy, and so on. So Market makers can be banks, foreign-exchange firms or high-frequency trading firms tasked with facilitating trade of a particular asset.

1.3. What is a Market Maker - Why do we need them?

The primary role of Market Maker is to provide liquidity or create opportunities for any participant to buy and sell large amounts of stocks, currencies, derivatives and other trading instruments. The participation of Market Makers contributes to maintaining the flexibility and liquidity of an asset, increasing their ability to trade and thereby attracting investors' interest.

1.4. How Market Makers Make Money

We have understood What is a Market Maker (MM) clearly. Now let's talk about how does Market Maker make profit? They have two ways of making profit.

1.4.1. Collecting the Spread

For Market Makers (MMs) in traditional financial markets, spreads are one of the main ways to earn profits. Spread (or Bid - Ask Spread) is the difference between the Bid price (buy price) and Ask price (ask price) of a financial instrument at a given time. For example, When an investor buys a stock on an exchange, they can observe a bid price of $99 and an ask price of $101. This means that the broker buys the stock for $100, then sells it to potential buyers for $101. Through high volume trading, a small spread can generate large daily profits.

1.4.2. Taking on Inventory

The other way to earn money is through taking on inventory. When there is panic selling following negative news of the market, for example, market makers are often the people buying as the crowd rushes to get out of the stock. After everything calms down, the market maker can slowly unload the inventory at more favorable prices, earning a profit for their willingness to absorb the risk during the panic selling.

2. What is an Automated Marker Maker (AMM)?

Many people regularly confuse the definition between MM and AMM. After answering the question “What is a Market Maker”, let’s get more information about Automated Market Maker (AMM).

2.1. Definition

Automated Market Makers (AMMs) enable permissionless and automated trading of digital assets using pools of liquidity rather than a traditional marketplace of buyers and sellers. On a traditional exchange platform, buyers and sellers offer different prices for an asset. In other words, instead of using traditional Market Makers (MM), the price and liquidity of an asset at any given time are maintained and determined based on an algorithm. The AMM mechanism does not have a seller and buyer concept, instead, smart contracts will act as an intermediary, the seller puts assets into a place called the Liquidity Pool, then the buyer will swap the assets they have. with assets in the pool via smart contract.

2.2. What is the role of AMM?

• Create a liquidity pool for the market.
• Allocate benefits to the community (developer + holder + liquidity provider).
• Ensure asset safety (users can hold, trade without depositing funds for third parties).

2.3. How do they make money?

Risks are numerous for liquidity providers. The first is the danger that their tokens may lose value. Additionally, when the asset rises or falls quickly away from the rate at which they provide liquidity, they are more vulnerable than Market Makers (MM) to suffering temporary losses. Liquidity providers in AMM will therefore earn a share of the transaction fees as compensation for their losses, and this is profit for AMM.

3. The difference between MM and AMM?

We have the answer for two question, "What is a Market Maker?" and "What is an Automated Market Maker?". So what is the difference between these two terms?

3.1. AMM is a better liquidity option for LTAs (Long-Tails Assets)

In essence, MM and AMM can both be used to create liquidity for any asset in the market, but in reality, very few experienced MMs approve the creation markets for LTAs due to the following factors:

• Trading volume is usually not really high and unsustainable.
• Prices are often volatile.
• After all, MMs exist primarily to make profit, therefore building markets for LTAs should not be the best option since they do not offer significant potential returns and also carry more risks.
• Unlike AMM in Crypto market, you don't need a professional MM to create a market for your token as you or any user can create a market for any token. Therefore, at the present time, compared to MM, AMM is a better liquidity solution for LTAs in the Crypto market.

3.2. Transaction fee

One thing to consider between the markets created by MM and AMM is the transaction fee. From a user perspective, trading fees in the markets created by MMs have transaction fees that are many times lower than those created by AMMs.

4. Conclusion

The information shown above is what Market247.io has collected to answer the question what is a market maker understandable and clearly. Don't forget to subscribe to the channel to update the most useful knowledge.

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6. What is a Market Maker (MM) - FAQs

Is market maker the same as broker?

No. Market Maker and Broker are two very important players in the market. Brokers are typically firms that facilitate the sale of an asset to a seller or buyer. Market makers are typically financial institutions or large investment firmsthat create liquidity in the market.

Who is the biggest MM in the US?

Citadel Securities is an American market making firm headquartered in Miami. It is one of the largest market makers in the world, and is active in more than 50 countries. It is the largest designated market maker on the New York Stock Exchange.

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