What is market making?
Market making is a trading method usually deployed by large firms to provide liquidity to different markets. However, we will only focus on the retail version of market making.
The concept in market making is consistently providing liquidity in the market and hoping to sell the position you have built while providing liquidity for a profit. Profit margins are usually extremely small and daily executed number of trades are extremely high.
We will continue onto this article assuming we are trading futures contracts that are settled in USDT. However, you can execute the same strategy for spot market or inverse swap contracts. While only difference being unable to short the market for spot trading.
What our advanced market maker bot in action
How does a market maker make money?
There are 3 potential different ways a market maker makes money.
Fees: Depending on the exchange you are using; you might pay or receive a rebate for your trade. For example, Bitmex and ByBit pays a rebate fee of 0.025% for limit orders. While, exchanges like Binance and FTX charges 0.02% for limit orders.
If we use an order size of 0.001 BTC (minimum order size for USDT contracts) which would cost us 0.1$ in margin, we would receive 0.0023$ in rebate fee from Bitmex and ByBit. However, we would be paying 0.0019$ to Binance and FTX in order to execute the same trade. As a result, it would come to a net difference of 0.0042$
Even though, the fees look extremely small, market makers will execute around 350–700 trades per day which can add up extremely fast and increase the cost of trading. So, it is highly advised to pick your exchange right. Read our exchange guide here.
Closing Position in Profit: This is more straightforward and less dependent on the exchange of your choice. Market makers aim for small margins anywhere from 0.1% to 0.5%. They maintain a limit take profit x% above their entry level.
Funding: Funding isn’t always going to be on your side. This is the downside of trading futures market compared to trading spot market. Every 8 hours exchanges charge a funding rate to keep your position open. 90% of the time funding is positive 0.01% which means longs pay shorts 0.01% of their open position’s worth. If you are a short side market maker, you have nothing to worry about. However, if you are a long side market maker, you need to take funding as an expense into your calculations.