Market-Making Types: Manual, Automated, and Decentralized
For every market to work, the buyer and seller of stock and security are required. But, what if there is no buyer for the seller? Or there is no seller for the buyer? In such cases, market makers play a vital role to provide liquidity and keep the market up by ensuring the continuation of the trade. These market makers can be available manually (in the form of broker), automated and decentralized.
What is Market Making?
In large-scale stock exchanges, there is a lot of liquidity. The buyers and sellers exchange their assets very often and hence, are listed in the big market. But, in the case of SMEs i.e., Small and Mid-sized enterprises due to less liquidity, often there are problems regarding the availability of buyers/sellers. In such cases, the brokers are hired through contracts for a fixed period and with a certain amount of ask/bid rate, which maintains the continuity (liquidity) of the trade.
It is the process of maintaining liquidity in the market through the Market-Makers who act as intermediaries in both the buying and selling of commodities.
Who Are Market Makers?
Let’s consider, that if an investor wants to sell his shares but there is no buyer, then Market-Maker comes into action, who acts as a broker appointed by the company or merchant banker who would buy the shares.
In this way, the Market-Maker makes a profit from the difference between the asking rate and bid rate.
These “market makers” are the large scale-traders who are always there at the “bid-ask spread” to make the market work. Market Makers are the individuals or companies that estimate and provide both buy and sell prizes across the financial scale.
Automated Market Makers
In the digitized world, we have automated algorithms that when executed, generate a mathematical dividend that defines the value of assets to be given to the investors.
These algorithms or AMM (Automated Market Maker) protocols are designed on smart contracts.
So, the trades are peer to contract instead of peer to peer.
It ensures that the liquidity of the market is maintained and the correct share of profit is given to the trader according to the algorithm.
It means, that here the AMM protocol acts as a liquidity pool and also as a mediator for buyers and sellers (brokers), making it an Automated Market Maker.
It ensures direct trading among the traders via a liquidity pool.
Decentralized Market Making
Decentralized-Exchanges with the AMM protocols are an integral part of the DeFi-system. These AMM protocols provide a peer to pool trading option instead of peer to peer trade.
To make it work, we need to develop an automated algorithm attributed to certain economic laws and formulas, which can work as a liquidity pool for the traders.
This eliminates the requirement of any intermediaries in the trading of cryptocurrencies.
Hence, AMM protocols make a reliable and more profitable platform for Decentralized Market Making.
Final Thoughts
So, finally, we have learned about various market makers available in different frames of requirement i.e., to facilitate it manually we always have brokers, while on Decentralized platforms we have Automated Market Making protocols that eliminate the need for any third party to maintain the liquidity. According to the situation, it completely depends upon the preference of the individual trader to choose the right platform for trading.
