Blockchain and Cryptocurrency Advanced - Benefits and Disadvantages of Market Maker Concept?
Provision of Liquidity
Marker makers are responsible for providing liquidity in the market. They do this by creating the Bid-Ask spread which is essential for trading. The liquidity created by marker markers makes it possible to buy and sell assets in the market which is what trading is all about.
Ensure healthy buy-ask spread
The Buy-Ask spread is very important as far as trading is concerned. It is what ensures that trading activities happens smoothly end easily. With market makers providing the liquidity and ensuring a healthy buy-ask spread, traders can buy and sell without drastically affecting the price in the market.
Helps to increase the trading activities in the market
This is another benefit of the market makers. They help increase the trading activities in the market due to high liquidity. The more buyers and sellers in the market, the healthier the market is which is great for all parties.
Favorable environment for small investors and traders
The presence of high liquidity and enough buyers and sellers in the market, small investors and traders who have little capital can also have good time in the market because they can purchase the desired amount of asset with the little capital and also sell their acquired assists at a desired amount easily.
Reducing the rate of price slippage
Price slippage happens due to quick change in price between the time a market trade is place and the time the market trade was executed. This is mostly caused by low liquidity which causes high volatility in the market. Market makers helps to reduce the price slippage because of high liquidity and healthy Bid-Ask spread.
Quick trade execution
Because of enough liquidity and healthy balance of buyers and sellers in the market, it makes it possible for traders to quickly execute trades at a desired price using the market order type.
Disadvantages of Market Maker Concept
Manipulation in the market
Marker makers have the capability to manipulate the market and drive the market to favor them to make more profit. The market makers wants to buy at low prices and sell at high prices. This can cause them to manipulate the market. The market makers can create a bid-ask spread in such a way that they can accumulate enough assets at low prices and sell at high prices.
Risk of loss of capital
Market makers are known to have large capital and because of this they can manipulate the market. This market manipulation can loss of fund of other smaller investors and traders who fall for the manipulation of the market makers. Also, the market makers stand a risk of massive loss due to negative factors that can cause a flood of sellers dumping. The market makers who have buy order will accumulate the worthless assets leading to huge loss of capital.
Can cause an unhealthy trading environment
We all know that market makers have huge capitals and are responsible for providing liquidity in the market. Because of this, they have the control of removing liquidity in the market. Market makers removing liquidity in the market can lead to unhealthy trading environment for traders.
Can cause decreased value of asset
The value of an asset in the market is greatly tied on the activities of the market makers. The value of the asset can be greatly decreased if the market makers decide to pull out their liquidity from the market. This can lead to more sellers in the market, causing the price to decrease.
