What Are the Capital Requirements for Market Makers in Physically Settled Crypto Markets?
Capital requirements are generally higher for market makers in physically settled markets compared to cash-settled ones. They must hold sufficient capital not only to cover margin and potential losses but also to physically acquire and securely hold the notional value of the underlying cryptocurrency for delivery or receipt.
This high capital lockup increases the barrier to entry and can limit the number of active market makers.
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.
Physically Settled Markets
Settlement ⎊ Physically settled markets for derivatives mandate the actual delivery of the underlying asset upon the expiration date of the futures or options contract.
High Capital Lockup
Capital ⎊ This refers to the substantial amount of underlying cryptocurrency or collateral required to be posted and held within a trading protocol or exchange to support open derivative positions.
Capital Requirements for Market Makers
Requirement ⎊ Capital requirements for market makers represent the minimum financial resources necessary to support continuous quoting activities in derivatives markets.
Physically Settled Crypto
Settlement ⎊ Physically settled crypto derivatives represent a class of contracts where the obligation at expiry is fulfilled through the direct delivery of the underlying cryptocurrency asset, rather than a cash settlement.