• Marina Gurevich

The Good, the Bad and the Ugly of crypto market making

Wintermute Trading article published here on #Hackernoon. #cryptomarketmakers #cryptomarketmaking #compliantcrypto #cryptotrading.

Ethical and compliant market making
The Good, the Bad, and the Ugly of Crypto market making; Source: Flickr

Moving into crypto from a traditional “boring” markets like equities or fixed income can be quite refreshing. No regulation, great volatility, exciting instruments and exchanges to trade on. However, there is a darker side to it. Certain practices, long thought to be the Wolf of Wall Street antics in the traditional markets are making a comeback in crypto.

As a market maker in this emerging asset class, I’ve been asked more often than I would have liked to for certain “services” to be added to the package. ICO projects may ask for a boost in the market price of their token, a boost in trading volumes, or both. There are two groups of ICO issues who come up with these requests:

  1. Well-intended ICO founders who would like to increase the short-term visibility of a project and bring more investors on board. These crypto projects may see these practices as just another marketing tool, without realizing the long term negative implications on the token reputation. They may also be just unaware of what constitutes good market making practices.

  2. Not-so-well intended founders who wish to disguise the fraudulent nature of their ICOs by generating some fake market demand.I’ve decided to write this blog post to address the first group and help the well-intended ICO issuers understand the Wild West of crypto market making.

Let me put it out straight away: promising a token price target or trading volume is not what a crypto market maker can do. In the crypto Wild West, a “Good” market maker can only guarantee the results it has full control of, such as spread and quote size.

Masquerading as “good” ICO market makers, there are other actors in town. The Ugly ones promise ICO issuers specific trading volume levels. While this would seem to attract more investors to the token and make a case for getting onto the higher tier exchange, one should be aware that nobody can really guarantee specific trading volumes (as it is not fully in market maker’s control). The Bad crypto “market makers” make one step further into the dark side, promising the aspiring ICO issuers that the price of their tokens would rise up to a certain level. Claims like these are even more harming in the long run and, for what’s it’s worth, these practices are outright illegal outside of the crypto space. Welcome to the crypto Wild West.

Let me dive deeper into how the Good, the Bad, and the Ugly of crypto market making works, what specific strategies market makers employ, and how you can identify these strategies.

The Good crypto market makers

Market makers’ role in any market is to provide liquidity, bridging the gap between buyers and sellers and ensuring the order trading. Market makers will be there, rain or shine, taking short term risk and compensating it with scores of trades in both directions. Since market makers profit from trading volumes, they will naturally be present in high volume products, such as bitcoin and top 10 coins. Less liquid tokens are less likely to get market makers providing the liquidity for free and would need to engage them in paid contractual agreements.

In such an agreement, the only thing a market maker can commit to is to provide a constant bid-ask spread in a determined quote size for the duration of the service engagement. Good crypto market makers have proprietary software that runs algorithms making thousands of transactions per day and a dedicated trading professional who keeps an eye on the market. This helps to accomplish bid-ask spread goals, but it cannot directly influence anything else, particularly the price and the trading volume. As I’ve written in my previous blogpost “Why your ICO needs a Market Maker”, getting a market maker on board can have a positive influence on these metrics, but this would be the result of the quality of your token not being constrained by the lack of liquidity.

The Ugly crypto market makers

Meet the Ugly. You can recognise these players by their promises to deliver certain trading volume levels. The most common strategy to accomplish this is called “wash trading”.

Typical wash trading “strategy” would involve a trader systematically trading with himself. A “novice” wash trader would simply place a large buy order and hit it with his own sell order within seconds. A more “sophisticated” manipulator would use smaller orders, place them over longer periods of time and even operate from multiple accounts instead of one (making it harder for the exchange to detect).

Trading volume manipulation is not something new to crypto. The practice has been banned in the USA almost a century ago, in 1936. Nowadays any regulated exchange would at the very least have a self-trade prevention, while the regulator, such as SEC or CFTC would be always on a watch for these practices. A simple google search would easily yield a good number of 5-digit fines in the cases like these:

A typical example of wash trading fees and reputation damages in the traditional markets
A typical example of wash trading fees and reputation damages in the traditional markets

Yet, crypto markets are unregulated. While I would expect some larger exchanges to get to self-trade prevention in the next couple of years, the first exchange a typical ICO is listed on is not going to fall under any regulatory oversight in the foreseeable future. From my experience, exchanges are currently reluctant to implement any anti-wash trading mechanisms, which leaves ICO issuers and investors on these platforms virtually unprotected against these practices.

The reason I call this practice Ugly (vs. Bad) is because I believe that not all crypto market makers who commit to specific volume target as part of their incentive compensation, plan to do wash trading. Some may be confident enough in your token to reach these levels with enough liquidity support. Some may outright gamble on the outcome to be successful, given their previous engagements. The ugliness of the situation is you create the incentive for them to engage in wash trading by including the volume target in your liquidity agreement. Given the complete lack of regulation, it might be on you if some of the good market makers fall to the ugly side.

The Bad crypto market makers

Wash trading may often be overlooked as almost a victimless crime. While it is not (and I’m going to cover it under “Long term consequences” below), there are some even more tedious practices out there. A crypto market maker who guarantees you a certain volume level might be just a good guy with a wrong incentive or little experience. Somebody who guarantees you a certain price increase of your token leaves little in his defence. I would be quite reluctant to use the term “market maker” for these groups or individuals.

Price manipulation comes in many shapes and forms. The most notable to mention are:

  • Pump-and-dump

  • Ramping

  • Cornering

Pump-and-dump practice is the mother of all price manipulation tactics. Get a team, buy a token and start promoting it on social networks. Once it flies enough, sell at a profit. All in a day’s work, behind the anonymity of a telegram channel.

Here is a snapshot of one of these channels:

Pump and dump in crypto market making
One of pump and dump telegram channels

Good crypto market makers don't do pump and dump
One of pump and dump telegram channels

A “market making” strategy would typically involve the same idea but with a longer duration period combined with a volume boost from their wash trading activities.

Ramping involves creating an impression of a big buyer, effortlessly going through the large market offers (belonging to the same principal owner). It is easy to get mislead by this behaviour and other, unsuspecting traders might feel compelled to “front-run” the big buyer and end up being the losers in the end. A crypto “market maker” can employ this tactic creating a phantom buyer doing large trades in a fixed time period (e.g. every day), making the market to get accustomed to this behaviour and driving the prices up. Needless to say, once the market making engagement is finished, the big buyer mysteriously disappears, and the token price is quite likely to plummet.

Cornering is an activity most typical to commodity markets, where the supply is limited, and it is quite difficult to maintain short positions over prolonged periods of time. Similarly, smaller tokens follow the same supply pattern. A fake market maker is not likely to make money by trying to buy big portion of tokens available if he is the only liquidity provider out there. However, he can use this tactic when there are more market makers of the same token, aiming to take over their inventory and force them to raise prices as they have to maintain the spread at the same level.

Needless to say, these three price manipulation practices are outright criminal in the regulated space and for a good reason — they disrupt the market, erase the confidence in the traded asset and cause the good actors to lose money in the long run. It might be tempting to enter into a crypto market making agreement with a promise of price going up; after all it’s so exciting to see your project appreciating! What may go unnoticed, however, is the aftermath of these tactics.

Long term consequences of the Bad and Ugly practices

Both price and trading volume suffer after being manipulated one way or another. And the results can be disastrous in the long run, with compounding effects on reputation and relationships with investors and crypto exchanges.

The most basic effect manifests itself in failed expectations. It is normal to expect the trading to “die off” a bit after the ICO listing. However, a pattern of stable trading volume and rising price both suddenly evaporating will inevitably lead to a conclusion that the whole crypto project is a low quality one, or just scam. You will lose trust of the very first investors in your token who are supposed to be your ambassadors. You will lose the trust of the exchange you were listed on and will likely get delisted. And in case you’ve made it to the higher tier exchange as a result of your high trading volumes, not only you’ll get kicked out, you’d find it incredibly hard to make it back to any other significant exchange with a “market manipulator” stigma on the token.

Finally, talking about the reputation effect, many of the professional investors, crypto exchanges and crypto VCs come from the more traditional financial and businesses backgrounds. They would be very quick to detect bad and ugly practices and, once they do, the reputation of ICO founders would be destroyed even if the founders were unaware of these practices taking place.


If you are a well-intended ICO with a quality product, long-term outlook, and a lot of concern for the success of your project, it is a wise choice to work with crypto market makers. Good market makers can help your token create a liquid market, attract sophisticated investors, and get listed on a higher tier exchange. In doing so, though, I encourage you to do a good diligence of your market makers: look at the profiles of the founders, their experiences, and their location. Ask about the exact strategies they will be using, and run away from anyone promising you certain trading volume and prices. Likewise, don’t ask your crypto market makers to achieve the metrics they don’t have full control of as this may incentivize them to engage in the practices that can be damaging to you.

*** Wintermute Trading only pursues the good practices of crypto market making, we are fully compliant to practices used in regulated financial markets. Contact us to learn how we can help your project(s)

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