By BroLeon (@BroLeonAus)
Today, I saw many KOLs asking under their tweets why so many altcoins were able to plunge to near zero on the night of the crash. I had similar doubts before, until I figured out how MM works in CEX.
@yq_acc 's post specifically discusses the market makers ' behavior and logic on the night of the crash, and is well worth a read for those who have the patience to understand the underlying mechanisms. Today, I'd like to briefly address some common misconceptions and questions about MM, focusing on the events of October 11th. Market makers, please feel free to criticize me if I'm wrong.
The article is very long and dry. It is 4000 words typed by hand and takes 5 minutes to read. It is not easy to write. Thank you for liking, collecting and forwarding~~~~
Who usually provides liquidity in CEX?
Centralized exchanges (CEXs) essentially just provide a platform (a casino). Active players year-round include project developers (various gambling tables), traders, and users (gamblers), as well as various market makers (MMs) providing liquidity. Of course, MMs aren't the only providers of liquidity; projects sometimes also provide initial liquidity on CEXs, especially when listing new coins. The accumulated limit buy and sell orders placed by retail investors also contribute to "market depth," but compared to professional market makers, retail liquidity is more fragile.
Why this role?
Market makers exist to allow every table to place orders at any time, eliminating the need for gamblers to bet without a counterparty. In layman's terms, they act like a lubricant; without them, the market would be very dry. Without market makers, buyers and sellers would need to be matched directly, leading to wide spreads in transaction prices and the ability for even small trades to cause significant volatility.
If you go to CEX and try to place orders on both large coins and particularly unpopular small coins, you can feel that there is almost no fluctuation in the flow of large funds in and out of large coins, while small coins may cause a 20% loss even if they cost tens of thousands of dollars.
Why doesn’t CEX do MM itself?
The simplest reason is that it requires huge amounts of capital, and the second is because of compliance.
As more and more tokens are created, each token requires liquidity, which adds up to a very large sum. From the perspective of CEX, the most cost-effective thing is to set up the casino stage and let everyone perform immediately, rather than doing everything by themselves.
Therefore, in regions with strict regulations (such as the United States), exchanges such as Coinbase and Kraken must strictly distinguish between matching and market making businesses. Coinbase even established an independent market-making subsidiary (Coinbase Prime/MM).
If a CEX acts as a MM, it can easily become both referee and player: possessing user data (order books, stop-loss points, position direction) while also being able to trade on its own account, creating a conflict of interest. This is one of the reasons for the controversy surrounding the allegations by some competitors that CEX itself was gambling with users.
How does MM make money?
There are two main categories of market makers: passive market makers (MMs) and active market makers (MMs), each with distinct profit strategies. Well-known passive market makers include Wintermute, GSR, and Amber Jump. Active market makers are generally more low-key, but their number is significant, and they are responsible for many of the most popular cryptocurrencies.
Passive MMs mainly make money through incentives from project owners (to maintain the market thickness 24 hours a day). The common structure is fixed fees + floating incentives, such as "monthly fee of $50K + 0.05% bonus of trading volume".
Then there are the arbitrageurs who are often active in multiple CEXs and DEXs at the same time. When the prices are out of sync, they immediately arbitrage: Active MMs are different. They are often deeply tied to the project parties, helping them to control most of the liquid chips, and then make money by raising funds to attract the market to chase high prices and dump stocks to harvest, or by more flexible market behaviors such as short squeezing.
Many retail investors’ nightmares in the past, such as $TRB, $MYX and the recent $COAI , were all masterpieces of active mm.
How many MM will be signed for each project?
Many projects may sign contracts with around three MMs in the initial stage, and then after a period of investigation, comparison, and elimination, one or two remain as the main MMs to maintain long-term liquidity support.
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Back to the point, why did many Altcoin plummet to incredible levels on October 11? Is this related to the behavior of market makers?
My answer is: Yes, and it’s huge.
First, as far as I know, there are about 50-70 active MMs on Binance, which support the liquidity of most tokens when the market is stable. However, with the rapid expansion of the number of Altcoin in the market and the weakening of liquidity, the liquidity of many old and small altcoins is only concentrated near the market price (buy 10, sell 10?), like the shell of an egg. In non-extreme situations, MMs can steadily earn spreads by constantly buying and selling. At this time, their interests are aligned with those of the project owners, and the operation is very good. When the USDE depegging on October 11 triggered a sharp drop in wBETH and BnSOL, which then formed a cyclical plunge,
A big problem has emerged in the market: there is a huge conflict between the interests of MM and maintaining the depth of the project party. To put it more simply, whoever continues to maintain the buying depth will be smashed to pieces and will not recognize his mother.
If this were you, what would you do?
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Let’s look at the timeline:
At 4:40am, real-time tracking data showed the beginning of a catastrophic liquidity withdrawal. Market depth on major cryptocurrencies plummeted from $1.2M.
At 5:00 a.m. , a critical turning point, conditions deteriorated dramatically, with bid-ask spreads widening and order book depth decreasing. This was when a large number of market makers (MMs) shifted from defensive positions to a complete exit. At 5:20 a.m., the chaos peaked, with virtually no MMs still providing services in the market, especially for smaller coins with only one or two MMs. After the collapse, there was a vacuum of orders below, leading to a 98% plunge (retail investors had long since stopped placing orders at such low prices).
At 5:35am, market makers began to cautiously return, gradually reaching 80%-90% of the pre-disaster level, but the disaster was already underway. This chart shows how quickly liquidity disappeared:
Therefore, we can actually infer that the real situation at that time was: Almost all the MMs who were still awake had begun to sense the coming of the storm after 4:40, and wisely withdrew all their orders and left the battlefield in the next 20 minutes.
More MMs formed a stampede and fled in the next 20 minutes. In the panic, few were willing to abide by the MM agreement signed with the project party - at that time, the money lost by not leaving was far greater than the sweet treats given by the project party.
At that moment, all rational traders were in self-protection mode - not seeking to make a profit, but just to avoid death.
In reality, those who didn't wake up and discover the problem in time suffered heavy losses during this wave, with some even waking up to find themselves hundreds of millions of dollars down. 24/7 cross-time zone deployments will likely become standard for MM teams in the future. Why was there no one arbitrageur when the price gap between Binance and other CEXs was so large? Remember, liquidity for major CEXs is provided by the same group of market makers. Wintermute, GSR, Amber, Auros, and Cumberland all make markets on platforms like Binance, OKX, Bybit, and Coinbase. When risks on one platform become acute (such as a surge in Binance futures liquidations), market makers collectively withdraw orders from all exchanges to avoid being affected by liquidations. Therefore, during those minutes of peak market volatility and the widest price gaps between CEXs, the entire market experiences liquidity shock. Binance is a prime target for recursive liquidations. With no one arbitrageur to stabilize the price, isn't the price the lowest?
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So the conclusion of my long article is: The current market maker system actually has limitations. When the market is normal, everything runs like a precision machine, but when a black swan appears in the market, it will only compete with retail investors in a panic stampede to see who can escape first.
Simply saying that Binance pulled the plug on the network and harvested the market maliciously can only be attributed to a lack of understanding of the MM system. Binance is a bigger target, right? Binance is not the same as MM; these are two different things. Of course, the black swan event was caused by the structural risk of USDe revolving loans, and Binance has a responsibility to prevent it. However, this crash did expose many problems, including the seemingly extremely stable market maker MM system that has been in operation for many years. If CEXs want to make further progress in the future, how can they solve this loose cooperation model that has caused monkeys to scatter when the tree falls? It is also very important.
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