Market Makers and Spreads

What Market Makers Do

Market makers provide liquidity by quoting bid and ask prices simultaneously. When someone wants to buy, the MM sells from inventory; when someone wants to sell, the MM buys into inventory. The spread between bid and ask is the MM's profit margin. They're essentially professional resellers of liquidity. In crypto, major MMs include Wintermute, Jump Trading, GSR, Cumberland, Amber Group, and many smaller firms. They handle a substantial fraction of total crypto trading volume across CEXs, DEXs, and OTC.

Why Spreads Are What They Are

MM spreads are calibrated to cover risks and costs. **Inventory risk**: holding crypto inventory exposes the MM to price moves. **Adverse selection**: some traders have information the MM doesn't — those trades cost the MM more. **Cost of capital**: capital tied up in inventory could earn yield elsewhere. **Operational costs**: infrastructure, salaries, fees. Wider spreads compensate for higher risks; tighter spreads reflect lower risks. BTC/USDC at major venues might trade with 1-2bps spread; obscure tokens might have 100-1000bps.

Why You Should Care

Spreads are a transparent cost you pay on every trade. A 50bps round-trip spread (25bps each side) means a $10K trade costs $50 just to enter and exit. Trading frequently against wide spreads is one of the largest drags on retail crypto returns. Understanding which assets and venues have tight vs wide spreads is essential for managing trading costs. Major-pair CEX spreads are tight; long-tail and DEX spreads can be substantially wider.

• MMs quote bid/ask simultaneously, profiting from the spread
• Major crypto MMs: Wintermute, Jump, GSR, Cumberland, Amber
• Spread reflects inventory risk + adverse selection + cost of capital + operational costs
• Spreads are a major retail-trading cost; understand which markets are cheap vs expensive