Many cryptocurrency investors have had similar experiences: a certain Altcoin seems poised for a breakout, but as soon as you buy in, the price immediately reverses and plummets, as if the market is "specifically targeting your trades." This situation is especially common among smaller coins, which has given rise to the saying "being targeted by market manipulators."
But is that really the case? In fact, price reversals are not necessarily due to subjective manipulation, but rather stem from the risk management behavior of market makers under specific models.
Dave, chairman of the Hong Kong University of Science and Technology Crypto Club, recently published a lengthy article on the X platform (account: @bc1qDave), systematically dissecting this long-standing market phenomenon that has plagued retail investors from the perspective of the microstructure and quantitative model of market makers.
In his article, Dave points out that most of these price reversals are not so-called "market manipulators targeting retail investors" or subjective manipulation, but rather stem from the automated price adjustments made by market makers under the Avellaneda–Stoikov market-making model based on inventory risk and toxic order flow. In other words, retail investors' trading itself often alters the market's risk pricing.
Market makers are not betting on the direction of a market; they are managing risk.
Unlike typical investors, market makers do not profit by predicting price movements. Instead, they earn stable income through two-sided quotes and spreads. Ideally, market makers maintain near-neutral inventory levels to minimize the impact of price fluctuations on their overall profit and loss (PnL).
However, this balance will be disrupted once a large number of buy or sell orders appear in the market.
You buy in large quantities
Equivalent to market makers selling a large amount
Market maker inventories turn into "short exposure"
At this point, the inventory itself becomes a source of risk.
Mechanism 1 | Quote Skew: Why do prices move in the opposite direction?
When market makers take on excessive short positions due to large-scale buying by retail investors, they have two core objectives:
Replenish inventory as soon as possible
Protect existing short positions from price reversals
Therefore, market makers will proactively lower their quotes to attract sellers while suppressing further buy orders. This behavior is perceived by investors as "the price drops as soon as I buy."
In fact, this is not targeted at individuals, but is the result of automatic adjustments by the pricing system.
Mechanism Two | Spread Widening: The Reason for Increased Difficulty in Closing Transactions
If the inventory imbalance worsens further, market makers will, in addition to adjusting prices, also:
Widening the bid-ask spread
Reduce transaction frequency
The purpose of this is to reduce the risk borne per unit of time, while offsetting potential price losses through higher spread profits.
The core concept behind the mathematics: Reservation Price
In a market-making model, the price at which retail investors actually trade is called the Reservation Price , which can be simplified as follows:
Reservation Price = Median Price − γ × q
Q : Current inventory of market makers
γ (gamma) : Risk aversion coefficient
When retail investors place orders in a concentrated manner, causing rapid changes in inventory, the reservation price will also be adjusted accordingly, thus affecting market quotations.
According to the Avellaneda–Stoikov model:
The best offer will revolve around the reservation price.
Inventory exhibits mean reversion properties
Spreads will widen as risk increases.
Simply put: it is your trading volume that changes the market's risk pricing.
Why are retail investors particularly prone to "Mercury retrograde"?
Compared to institutional and professional traders, retail investors often have the following characteristics:
Almost all were proactive orders.
Order sizes are concentrated
The rhythm is not hidden, and orders are not split.
There is no hedging mechanism
In mainstream cryptocurrencies with good liquidity, these effects may be offset by other trading pairs; but in Altcoin, your order is often the most important market signal in a short period of time.
In other words, in the altcoin market, you are very likely to become the counterparty of the market maker.
What is the true objective function of a market maker?
Rather than saying market makers want to "crush retail investors," it's more accurate to say they're pursuing the maximization of the following objectives:
Maximizing spread profits – Inventory risk – Adverse selection risk
Inventory risk is often taken into account in an "exponential penalty" manner, which is why price adjustments are so rapid and decisive.
Practical tips for retail investors: Utilizing the pricing mechanism in reverse
If you already understand the pricing logic of market makers, you can actually make some use of it.
For example, suppose you want to establish a long position of 1000 USDT:
Don't buy all at once.
Buy 100 USDT first
Wait for the price to drop in the quotation system before gradually increasing your position.
By entering the market in batches, your average holding cost is often lower than if All In all in at once.
To be continued | The toxic order flow is the other half of the truth
This article only reveals one reason for price divergence—inventory-driven pricing mechanisms. Another key factor is how market makers identify and defend against "toxic order flows."
In the next article, Dave will delve deeper into:
How market makers analyze order books
What kinds of trades are considered "toxic"?
And the microstructural causes of certain extreme market events
Why do Altcoin drop as soon as you buy them? Unveiling the market maker pricing mechanism, it turns out it's not "market manipulators targeting you." This article first appeared on ABMedia, a ABMedia .
