Keyrock

An essential part of crypto market making is to develop efficient ways to monitor and analyze market conditions. This allows crypto market makers to make informed decisions about where, when, and how to deploy liquidity and apply crypto market making strategies.

Depth, spread, uptime, and trade flow imbalance, are terms we must become familiar with in order to make the right observations. They refer to specific market conditions that clue crypto market makers in on what opportunities and risks could or could not exist. 

Let’s jump into what they mean and how to look at crypto markets through their lens.

The “depth” of a market refers to the volume of buy and sell orders available at different price levels for a particular asset. This represents the willingness of market participants to buy or sell the asset at various prices.

In the context of crypto markets, depth measures the amount of liquidity that is already present in the order book in the case of centralized exchanges or the liquidity pool in the case of decentralized exchanges.

Depth is directly related to the liquidity of a market and can be an indicator of price stability or volatility, depending on the situation: 

1. In a deep market with ample liquidity, larger buy and sell orders are absorbed by the existing orders in the order book, resulting in minimal price impact. 
2. On the other hand, in shallow markets with limited liquidity, even relatively small orders can cause more substantial price fluctuations.

Assessing the depth of a market can shed light on its expected volatility and help crypto market makers determine how much liquidity provision is necessary.

The “spread” of a market refers to the difference between two related financial metrics, such as bid and ask prices, yields, or interest rates. 

In the context of crypto markets, spread typically refers to the bid-ask spread, which is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a particular asset. 

Spreads can provide useful information to crypto market makers regarding what the market needs and how to provide it:

1. A narrow spread indicates a liquid and efficiently traded market, as there is little difference between the prices at which traders are willing to buy and sell the asset. This can be desirable because it reduces trading costs and allows for easier entry and exit into position. In that scenario, market makers effectively match orders in a way that the market stays liquid and that asset prices remain optimized for sellers and buyers.
2. On the other hand, a wide spread indicates lower liquidity and potential market inefficiencies. In illiquid markets or during periods of high volatility, spreads may widen, making it more expensive to execute trades. In that case, crypto market makers will provide liquidity to close the gap, as their primary role is to maintain asset value at a healthy price to avoid big market impact and improve market depth.

Assuring liquidity at all times necessitates a high level of technical dependability, as market makers must rely on sturdy technologies to keep their operations running effectively. As a result, the concept of “uptime” is a critical component that must not be overlooked.

In the context of trading, “uptime” refers to a trading system’s operational availability. It shows that the system is working consistently and reliably, with no outages or interruptions. It’s usually given as a percentage, with higher percentages suggesting better dependability. For example, “99.9% uptime” indicates that the system is active 99.9% of the time and down only 0.1% of the time within a certain period.

Consequently, uptime is a crucial parameter for market makers, as it is a strong indicator that their trading algorithms are reliable enough to constantly adjust themselves in response to market conditions but also to reflect optimum assets’ pricing.

News, major announcements, or even rumors often get reflected on markets as a direct reaction to these current events. Traders, institutions, and other relevant parties may all act in the same way, opting to sell or buy at the same time, causing an asset price to swing to the upside or downside.

As a result, having too many buyers or sellers at the same time jeopardizes the asset’s liquidity because there isn’t a buyer or seller to match the order. Such occurrences result in price volatility, and market makers are in an ideal position to address this issue.

By providing liquidity, market makers are able to temporarily clear out surplus orders from inventory, ensuring the trading of an asset to get back at a stable pace, ultimately contributing to overall market stability.

Depth, spread, uptime, and trade flow imbalance are some of the characteristics that crypto market makers monitor to ensure that their liquidity strategy does not disrupt the markets in an unfavorable way.

While market changes are typical and expected, reducing price impact risk and volatility is critical for efficient trading. As a result, having a crypto asset overseen by a market maker benefits both the token issuers and the buyers.

Keyrock’s proprietary market making technologies also draw from these observations to provide competitive liquidity for each market.

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