Why Is It Difficult to Maintain Sufficient Liquidity for a Single Exchange’s Price to Be Representative?
Liquidity naturally fragments across multiple trading venues in the crypto space. No single exchange typically captures the entire market's trading volume.
Therefore, a price from one venue, even a large one, is only a partial view of the total market. Using a single price for settlement would ignore significant trading activity elsewhere, making it unrepresentative.
Glossar
Central Limit Order Book
Aggregation ⎊ This mechanism collects all outstanding buy and sell orders into a single transparent ledger.
Trading Venues
Exchange ⎊ Cryptocurrency trading venues encompass regulated exchanges, acting as intermediaries facilitating the buying and selling of digital assets.
Sufficient Liquidity
Liquidity ⎊ Sufficient liquidity refers to a market condition where an asset, such as a cryptocurrency, an options contract, or a financial derivative, can be bought or sold quickly without causing a significant price impact.
Role of Market Makers
Role ⎊ The primary role of market makers in the cryptocurrency and derivatives ecosystem is to provide continuous, two-sided quotes ⎊ both bid and offer ⎊ thereby injecting essential liquidity into the market.