Eric Gravengaard is the co-founder of several digital currency businesses including Athena Bitcoin and Red Leaf Advisors.
I have spent much of my career in financial services working for Chicago’s proprietary trading firms which act as market makers on the derivatives exchanges. These firms are responsible for providing prices to the derivatives exchanges (CBOT, CME, CBOE) for options contracts, futures, etc. and are an important part of an orderly marketplace.
In this post, I will discuss both the function and role of a market maker, the rules that govern market makers in the United States at major exchanges, and how that should guide exchange rules for crypto assets including ICOs and STOs.
Making a market orderly
The goal of any exchange is to create an orderly market for assets, whether they be stocks, futures, options or anything else that can be traded.
Orderly is defined as having a balance between buyers and sellers that deal in an equitable manner at prices that are roughly equal to fair value. One way exchanges create orderly markets is by selecting or permitting market makers who have both an obligation to provide quotations and in return receive special access.
In general, market makers are obligated to provide a quotation, prices to buy or sell an asset, at all times when the market is open. Exchanges can then guarantee to customers that they can trade at a reasonable price at all times. Markets without market makers can be functional and orderly, but there are no guarantees that a customer will always be able to trade a reasonable amount for a reasonable price, unless someone is obligated to provide such a quotation.