How Do Centralized Exchanges Generate Revenue from Their Market Making Activities?
Centralized exchanges can generate revenue from their market making activities in several ways. The most direct method is through the bid-ask spread.
When the exchange acts as a market maker, it profits from the difference between the price at which it buys an asset (the bid) and the price at which it sells it (the ask). Additionally, some exchanges have their own proprietary trading desks that engage in market making and other trading strategies to generate profits.
They can also charge fees to other market making firms for the privilege of providing liquidity on their platform.
Glossar
Revenue
Yield ⎊ Revenue within cryptocurrency, options trading, and financial derivatives represents the economic gain derived from deployed capital, factoring in both explicit payouts and implicit benefits like optionality value.
Market Making
Framework ⎊ The essence of market making, particularly within cryptocurrency derivatives and options trading, revolves around providing liquidity by simultaneously quoting bid and ask prices for an asset.
Proprietary Trading Desks
Entity ⎊ Proprietary Trading Desks are specialized financial entities that engage in market transactions using the firm's own capital, rather than acting as an intermediary for clients.
Centralized Exchanges
Exchange ⎊ Centralized exchanges (CEXs) represent a critical infrastructure within cryptocurrency markets, facilitating order matching and settlement for a diverse range of digital assets, including options and derivatives.
Market Making Firms
Function ⎊ Market making firms serve the primary function of providing liquidity to financial markets by continuously quoting both buy and sell prices for assets and derivatives.
Market Making Activities
Activity ⎊ Market Making Activities in crypto derivatives involve the continuous quoting of bid and ask prices for contracts like futures or options, ensuring a continuous two-sided market exists for other participants to trade against.