How Do Market Makers Address Low Liquidity?
Market makers address low liquidity by providing continuous bid and ask quotes, thereby narrowing the spread and increasing the perceived depth of the market. They profit from the spread but take on inventory risk.
In very low-liquidity markets, they may widen their spreads significantly to compensate for the higher risk of being unable to offset their positions.
Glossar
Market Makers
Function ⎊ Market Makers in cryptocurrency, options, and derivatives markets actively provide liquidity by simultaneously offering to buy and sell assets, narrowing bid-ask spreads and facilitating efficient price discovery.
Automated Market Makers (AMMs)
Architecture ⎊ Automated Market Makers (AMMs) represent a fundamental shift in exchange design, utilizing algorithmic liquidity provision rather than traditional order books.
Low Liquidity
Impedance ⎊ Low liquidity within cryptocurrency, options, and derivatives markets signifies a diminished capacity for large transactions to be executed without substantial price impact.