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In the 7×24 hour uninterrupted trading ecosystem of cryptocurrency, market makers always play a core hub role. They are both a liquidity bridge connecting buyers and sellers and a key force influencing price formation—acting as price stabilizers during stable market periods and becoming amplifiers of volatility during extreme conditions. Some leading institutions actively lead price trends through strategic operations, forming a complex market game pattern. Behind this duality lies the intertwining of capital logic, technical models, and market ecology.
Normal Markets: Liquidity Supply Shapes Reasonable Pricing Benchmarks
The core value of market makers lies in filling market liquidity gaps by continuously providing two-way quotes, a function that is particularly crucial in the crypto market. Compared to traditional financial markets, crypto assets generally suffer from insufficient trading depth and price fragmentation. Market makers effectively improve market depth by placing continuous buy and sell orders in the order book, dynamically adjusting bid-ask spreads to balance inventory risk, and fundamentally reducing slippage for investors. For key events such as new coin listings (TGE), the dedicated market-making quotas provided by market makers are indispensable—they prevent tokens from experiencing sharp rises and falls at the opening by pre-setting price ranges and liquidity levels, creating a buffer for market price discovery.
Beyond single-market liquidity support, cross-scenario arbitrage mechanisms further strengthen the price calibration role of market makers. Top market makers leverage multiple channels, including centralized exchanges (CEXs), decentralized finance (DeFi) liquidity pools, and over-the-counter (OTC) trading, to quickly smooth out price discrepancies across different markets using strategies such as futures-spot arbitrage and cross-exchange spread arbitrage, promoting coordinated price movements between on-exchange and off-exchange markets, and between on-chain and off-chain markets. This arbitrage behavior is essentially a market self-correction process, ultimately leading to reasonable pricing that reflects the true supply and demand of assets. This is the core of the "delta neutrality" strategy upheld by most compliant market makers—aiming to provide liquidity rather than actively guiding price direction. Data shows that 67% of crypto community members believe that increasing the transparency of market-making activities can effectively improve market trust, and this demand is driving the industry towards more standardized price disclosure.
Extreme Market Conditions: Risk Control Failure Triggers Liquidity Collapse
The high volatility of the crypto market often serves as a litmus test for market makers' risk control capabilities. However, when risk control models fail, market makers themselves can exacerbate volatility. In one-sided market movements triggered by black swan events, market makers' inventory risk rises sharply. Coupled with the impact of concentrated liquidation of leveraged funds, their preset risk control thresholds are triggered, initiating passive response mechanisms: on the one hand, they fill the funding gap by massively selling off their holdings, directly increasing market selling pressure; on the other hand, they shrink their balance sheets, significantly reducing the size of pending orders to avoid further losses, leading to a sudden depletion of market liquidity.
The chain reaction triggered by this liquidity withdrawal is extremely destructive. When the market lacks sufficient buy orders to absorb the selling pressure, even small sell-offs can break through multiple price levels, creating a "waterfall-like drop," and the forced liquidation mechanism of leveraged contract markets further amplifies this effect. The market flash crash on October 11, 2025, is a typical example. Some leading market makers' self-rescue sell-off in response to their own liquidity crisis caused mainstream cryptocurrencies to fall by more than 15% in a short period. Subsequently, due to the continued contraction of market-making scale, market liquidity remained low, and prices fell into a prolonged period of weakness. Behind this phenomenon lies the industry pain point of crypto market makers' over-reliance on algorithmic models—when the market deviates from historical data trajectories, programmatic risk control struggles to make flexible adjustments, ultimately transforming them from risk hedgers into risk creators.
Active Market Control: A Game of Harvesting Bulls and Bears Through Capital Operations
While most market makers tout a neutral strategy, some top institutions, leveraging their advantages in capital, technology, and distribution channels, actively manipulate prices through a closed-loop operation of "accumulation-pump-dump," becoming implicit price leaders in the market. The core logic of this operation is to exploit the information asymmetry and high proportion of retail investors in the cryptocurrency market to profit from both long and short positions.
Specifically, a complete manipulation chain typically consists of three stages: The first stage is low-level accumulation, where market makers accumulate spot tokens through covert methods such as order splitting and off-exchange acquisitions, while quietly establishing long positions in the futures market to avoid alerting the market; the second stage is concentrated price manipulation, creating the illusion of price increases through continuous large-scale purchases, and using market sentiment guidance to attract retail investors to chase the price up, thus driving a rapid price increase—Floki, the meme coin, experienced a similar operation, with its price surging 772% in three weeks, driven by market makers' funds; the third stage is precise harvesting, where after the price reaches the preset target, market makers first close out their long positions and then establish large short contracts, subsequently dumping spot tokens to trigger a price crash, forcing retail investors to liquidate their long positions, and finally locking in profits by closing out short positions, completing a full round of long-short harvesting. The root cause of such behavior is often incentive misalignment. In some "option + loan" cooperation models, market makers, in order to obtain excess returns, do not hesitate to sacrifice the interests of project owners and retail investors, becoming the main source of market trust deficit.
Regulation and Industry: Finding a Balance Between Standardization and Innovation
The complex role of market makers has also prompted regulators to gradually establish targeted regulatory frameworks. The UK Financial Conduct Authority (FCA), in its 2025 discussion paper on regulating crypto asset activities, explicitly proposed requiring trading platforms to disclose the business relationships of market makers, prohibiting market manipulation through false quotes, and strengthening protections for retail investors. This regulatory approach draws on mature experience from traditional financial markets while also taking into account the technological characteristics of the crypto market, attempting to find a balance between encouraging liquidity supply and preventing market manipulation.
From the perspective of the industry's own development, crypto market making is gradually evolving from a "black box operation" towards transparency and standardization. On the one hand, Web3 native market making protocols are emerging, referencing traditional financial ISDA protocols to formulate clear terms and regulations, improving the transparency of cooperation. On the other hand, the improvement of on-chain infrastructure has made models such as decentralized order books (DLOBs) possible, significantly improving the auditability of market making activities. Traditional market making giants like Susquehanna International Group (SIG) are also entering the crypto market through compliance initiatives, providing transparent liquidity services to institutional clients and driving the industry towards a healthier direction.
For investors, understanding the dual nature of market makers is key to risk mitigation. While enjoying the trading convenience provided by their liquidity supply, investors must be wary of the risk of liquidity depletion under extreme market conditions; when faced with assets experiencing short-term price surges, it is even more important to rationally distinguish whether the price increase is driven by genuine demand or the result of capital manipulation. With the improvement of the regulatory framework and the strengthening of industry self-regulation, market makers are expected to gradually return to their essential role as liquidity providers, and the price formation mechanism of the crypto market will mature through a balance between regulation and innovation.
