In the crypto space, a lot of people think that a market maker is a trader, or a group of traders, with a large amount of capital and a directional bias who is able to push the market around. In other words, their orders or trades are so large that they are capable of moving the price significantly to suit their needs. While maybe these type of traders do exist, it’s not what a market maker is.
As the name suggests, a market maker is someone who makes a market by giving buy orders and sell orders for others to trade against. They quote both sides of the market and are making money from the spread between their buy and sell price. Often, they arbitrage their trade at another exchange: buy low and sell high at almost the same time. Others might be running strategies that buy and sell at a high frequency. They are mostly non-directional liquidity providers. They do not necessarily care if the price goes up or down, simply want to have their bids and asks hit as many times as possible so on each trade they can make a small profit.
As you might imagine, the profit per trade doing this is going to be much lower than, for example, swing trading large percentage moves. However, the risk is also much lower (hedging where necessary). And it’s all about volume! Repeating the process many times for small but consistent gains.
Market Making on Deribit
Deribit does not have an in house trading desk. All market makers on Deribit are third parties. They are a vital part of the ecosystem as they provide liquidity around the clock on instruments that would otherwise have books too thin for many people to trade effectively.
What Market Makers Do and Don’t Get on Deribit
Much has been written about markets being manipulated on various Bitcoin exchanges. It is one of the disadvantages of non regulated exchanges; there’s no transparency and an exchange can give certain traders or desks a trading advantage. Despite Deribit not being regulated today, we can assure you no traders have any trading advantage over others.
Depending on volume, market makers may get a custom agreement on fees and help set up. In exchange for this and depending on what instruments they are quoting on, there will be certain rules they must follow as well. These rules will include a minimum percentage of time they must be quoting, how many instruments are covered, maximum bid/ask spreads and minimum quote sizes.
It’s also worth noting that market makers on Deribit do not get access to any insider information that isn’t available to other users and they also do not get preferential order queuing or access to any special features/order types not available to everyone else.
Market Making on the Deribit trading engine
Deribit offers more than 100 strike price/expiry price combinations in the Bitcoin options market. Each of these has both a call and a put and each of those can be both bought or sold: we’re talking about 400 orders in the books that need to be updated every instance the Bitcoin price changes. One can imagine all these prices need to update as fast as possible by the market makers and thus needs a very responsive and robust trading engine.
Market makers, as well as other larger traders and people using automated systems, may also choose to have their software located as close to the Deribit servers as possible. This will give their systems the lowest latency possible. While Deribit doesn’t offer any specific co-location services, the server location is displayed on the website, enabling traders to install their trading software in the best possible location. This should give a latency of less than 1 ms to our servers. The server is currently located in the OVH data center SBG1 in Strasbourg, France.
Market Makers on Deribit
QCP Capital is a crypto trading firm based in Singapore. Besides proprietary trading, QCP runs an OTC desk that covers spot, forwards and options 24/7.
Darius Sit, managing partner at QCP Capital: “Deribit is an ideal trading platform with a user-friendly UI that makes for efficient trading. For options trading specifically, the optimal margin terms, amiable community and approachable management allows us to effectively execute our strategies.
As an OTC-focused desk, we are looking forward to a feature where we would be able to cross customised contracts with our counterparties. Using Deribit as a central settlement platform would greatly benefit our options franchise business. We are also looking forward to trading options on ETH and other coins as well.”
Magpie Capital is a fund that specializes in cryptocurrency derivatives trading.
Darshan Vaidya, CIO of Magpi Capital: “This a sector that we believe still has plenty of room to grow as the market becomes more sophisticated. Whilst still in its nascent stage, we believe options can be a huge part of providing stability to existing market participants and new entrants into the space.
Deribit has been a visionary in terms of spotting this need in cryptocurrency markets at a very early stage and is an established exchange that has proven to be dynamic, reliable and focused on improving its user experience, for both professional firms and individual users.
As well as introducing more asset classes to trade futures and options on, we believe it’d help institutional hedgers and speculators if Deribit included a Blocking mechanism for larger trades and the ability to trade and quote strategies of options (combinations of different outright options). Stablecoin settlement further down the road may also increase the ability to add more asset classes more easily.”
XBTO is a world leader in digital asset trading and investing.
Philippe Bekhazi, CEO of XBTO: “We primarily develop tools and algorithms to provide high-quality liquidity to the world’s digital asset markets, in spot and derivatives. We’re also an investor in the digital asset space.
Due to Deribit’s excellent technology stack, differentiated product lineup and its prudent approach to risk management, XBTO has been an early mover in providing market making flow to Deribit’s various order books.
Certain key features such as block trading and RFQ for complex option structures will be critical to increasing volumes and for furthering customer satisfaction. In the future, it will be interesting to see how Deribit can evolve into a globally regulated crypto-derivatives exchange.”
Deribit already has plans for some of these additional features in the pipeline that will make both market makers and regular traders’ lives much simpler, particularly for larger or multi-legged options positions. And with more currencies currently in the process of being added, there will be even more instruments that need quoting in future. So there is plenty of room for growth for Deribit itself, for traders using the platform and the general Bitcoin investment space.