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Cryptocurrency liquidity: How to choose crypto liquidity providers

July 6, 2023

Selecting a premier liquidity provider can truly propel your crypto venture. Whether your focus is on a crypto project or exchange business, high liquidity and comprehensive order books will undoubtedly attract more investors and traders. Besides, it can enhance user trading experience by curbing slippage and reducing trading costs.

This article aims to provide insight into the role of crypto liquidity providers in the market and how to find a crypto liquidity provider that fits your specific needs. It will also guide you through the essential factors to consider when seeking for the best crypto liquidity provider in 2023.

What is a crypto liquidity provider?

To grasp what a crypto liquidity provider is, understanding the concept of crypto liquidity is vital. Crypto liquidity refers to the ease of buying and selling crypto assets promptly and at market price. The absence of such an opportunity signifies low liquidity. When liquidity is low, it can take longer to find a trading counterparty or require sellers to lower their prices and buyers to increase theirs in order to complete a transaction. The more trades executed per unit of time and the smaller the spread between bid and ask prices, the better the liquidity.

Crypto liquidity providers play a crucial role in the world of cryptocurrency trading. Essentially, they act as intermediaries that connect buyers and sellers, enabling supply to meet demand in a timely manner. To do this, they hold onto crypto assets in their accounts and can act as either a buyer or seller in a given transaction. Unlike traditional investors, liquidity providers  continually trade in and out of relatively short-term positions, providing liquidity in all market conditions, not just when they desire to accumulate or close-out longer-term investment positions. This helps to ensure that the market remains stable and efficient, even during periods of high volatility.

They are instrumental in resolving liquidity issues for both cryptocurrency exchanges and over-the-counter venues. They work directly with customers or via brokers to fulfill client orders and maintain asset liquidity. By providing their services to both buyers and sellers, liquidity providers help ensure that the market remains stable and that trades can be executed quickly and efficiently. 

Most crypto liquidity providers are regulated and supervised by financial authorities, which ensures that they adhere to international standards, national laws, and other stipulations concerning crypto liquidity provision. This helps to protect investors and ensures that the market remains fair and transparent. Overall, liquidity providers play a critical role in ensuring that the crypto market remains stable and efficient, which is essential for the growth and development of the industry.

Crypto liquidity as a key market metric

Liquidity in the crypto market stems from robust trading, evident in numerous market buy and sell orders, as well as pending orders in the order book and available quotes in the quote-driven trading systems. The prices at which liquidity providers send quotes and orders to trading venues are based on available information about asset prices and the associated risks of transacting and holding those assets.

Having sufficient liquidity is crucial for market health. Liquid markets enable market players to effectively manage, hedge and transfer risk, and allows investors to maximize their returns. 

Liquidity is a fluctuating measure that indicates changes in the trading volume of a crypto asset over time. It is influenced by various factors. Let’s explore a few: 

Trading Volumes

Trading volumes are a liquidity indicator because they represent the number of coins or contracts that are being bought and sold in a particular market. High trading volumes indicate a high level of activity and interest in a particular digital asset or market, which means that there are many buyers and sellers willing to trade at a given price. This high level of activity increases the liquidity of the market, making it easier for traders to buy and sell securities quickly and efficiently. 

Bid/ask spread 

The bid-ask spread is a liquidity indicator because it represents the difference between the highest price a buyer is willing to pay for an asset (the bid price) and the lowest price a seller is willing to accept for the same asset (the ask price). A market with high liquidity is characterized by a narrow bid/ask spread, as there is significant demand and supply for the product, leading to competitive pricing.

Market Depth 

Market depth is an important indicator to measure liquidity because it provides information about the supply and demand of a particular asset or security. It shows the number of buy and sell orders at different price levels, which gives investors an idea of the potential market impact of their trades. A deeper market depth means that there are more buyers and sellers willing to transact at different price levels, which indicates a higher level of liquidity. This means that it is easier for investors to buy or sell the security without significantly affecting its price.

The case for strong crypto liquidity

A highly liquid market is ideal for all trading stakeholders. It offers improved prices for brokers and traders, as the quantity and size of buyers and sellers create a balanced instrument price, satisfactory to all participants.

Additionally, it assures stable market prices, preventing significant fluctuations in a short period of time. In a stable market, large orders can be managed without causing major price spikes or changes. Thus, brokers can offer swift and smooth execution for a larger client base and bigger orders.

Another high liquidity perk is the ability to conduct more accurate market analysis. In a stable and liquid market, various analysis tools provide more predictable and precise insights.

Different Types of Crypto Liquidity Providers

The cryptocurrency market, due to its global reach, high fragmentation, and significant levels of development, caters to thousands of companies and millions of retail investors worldwide. To meet the immense demand for crypto products and trading, various entities ensure a steady level of liquidity in the fragmented crypto markets, even during periods of high volatility and market turbulence.

Institutional Liquidity Providers

Institutional liquidity providers are entities that operate like financial intermediaries such as large banks, brokers or hedge funds. They allocate substantial funds to maintain liquidity, operating on a larger scale in terms of available capital and other business size indicators compared to other types of liquidity providers. Currently, these types of liquidity providers operate on traditional exchanges that offer exposure to cryptocurrencies in the form of exchange-traded products or derivatives. However, they are reluctant to provide liquidity to crypto-native exchanges due to regulatory uncertainty and the evolving market structure related to post-trade settlement and custody.

Over-the-Counter (OTC) Desks and Brokers

OTC desks and brokers are the go-to solution when there is a need to conduct a large transaction and minimize price impact. These experienced players in the crypto market assist clients with big orders by acting as counterparties or intermediaries, helping to find sellers or buyers for the required crypto asset. They are able to offer competitive pricing, possess deep market knowledge, maintain strong client relations, have a good reputation, and boast an extensive transaction history.

Market Makers

Trading low-liquidity instruments can be extremely challenging, making the provision of market liquidity the key role of market makers. They are typically trading firms, including high-frequency traders, and hedge funds. They make profits by earning the bid-ask spread, which is the difference between the buy and sell price of an asset. Market makers play an important role in the crypto market by helping to increase trading volume and providing liquidity to other traders. During a sell-off triggered by market turbulence, market makers are often the ones purchasing the asset as investors rush to exit their positions. When the situation stabilizes, the market maker can gradually sell off the asset at more advantageous prices, earning a profit for assuming the risk during the panicked selling. Often, market makers are hired by exchanges to provide liquidity on particular assets and maintain the market in a good state.

Why crypto exchanges should not be their own marker makers?

When an exchange acts as both an exchange and a market maker, conflicts of interest may arise as the exchange has access to information that other market participants may not have. This could lead to the exchange prioritizing its own interests over those of its customers. For example, the exchange may manipulate prices to benefit its own trading activities or give preferential treatment to certain clients. Additionally, the exchange may have access to order flow data, which could be used to front-run customer orders or provide an unfair advantage to its own market-making activities. To mitigate these conflicts of interest, exchanges must adhere to regulatory guidelines and disclose any potential conflicts to customers. 

How to find a crypto liquidity provider in 2023: 7 key factors to consider

Now that you understand the crucial role crypto liquidity providers play in the market, it's time to delve into the essential criteria to consider while selecting a trustworthy provider.

Trading Volumes and Market Access 

A dependable crypto liquidity provider should guarantee access to substantial trading volumes to sustain a liquid market. Moreover, the provider should offer an array of markets and trading venues, ready to redistribute liquidity from one to another when necessary.

Pricing & Fees 

When seeking a crypto liquidity provider or market maker, it's crucial to find the best possible deal. Ensure to assess the pricing strategy carefully by directly contacting the provider. Understanding what others charge for similar services can prove beneficial during decision-making. When navigating the world of cryptocurrency, it's important to be wary of market makers who offer questionable services, such as making promises about token prices or trading volumes in exchange for payment. In this unpredictable market, it's crucial to work with a reputable market maker who can only guarantee certain aspects of their services, such as the spread and quote size. By being cautious and selective in choosing a market maker, investors can better protect themselves and their investments. 

Regulatory Compliance 

Compliance with rules and regulations is another key aspect to consider. This is crucial to ensure the safety of your funds and adherence of the business to all norms. Check with the regulatory body in the provider's country and peruse the compliance information on the provider's website. If any questions persist, reach out directly to the provider.

Reputation

A company's reputation is pivotal for its success. Since providers vary in effectiveness, it's critical to verify their reputation and confirm their service quality. Online resources and reviews can be useful. Additionally, directly interacting with the provider and exploring unbiased evaluations can aid in informed decision-making.

Security Profile

Cyber security is a key consideration in providing reliable market access and organizational services. Hence, the level of protection offered by the liquidity provider deserves special attention.

User Experience 

A top-notch user experience is a must for seamless, secure, and fast market access. Customer service is crucial for market makers and liquidity providers because it directly impacts their reputation and success in the market. Good customer service can help build trust and loyalty with customers, which can lead to repeat business and positive word-of-mouth referrals. 

Finery Markets: Best crypto liquidity, one platform

Choosing Finery Markets, a premier liquidity marketplace and OTC trading platform, is an optimal choice for businesses and institutions seeking robust and efficient crypto liquidity. With our technological solution, you not only gain access to superior crypto liquidity, but also enjoy a multitude of benefits that significantly surpass the alternatives available in the market.

  • Superior Connectivity: Finery Markets connects you to multiple liquidity providers through a single API/GUI. This effectively eliminates the complexities and operational costs associated with maintaining multiple connections, and addresses the issue of unexpected order rejections due to the "last look" privilege of liquidity providers, thus ensuring seamless and cost-efficient execution.

  • Predictable Execution: Unlike traditional order routing solutions that rely on indicative prices, Finery Markets aggregates firm orders from various market makers, providing you with predictable execution. We guarantee a 0% rejection rate and minimized slippage, and offer a transparent order book across all liquidity providers.

  • Automated Settlements: Finery Markets supports flexible, automated settlements across multiple banks and blockchains. Our platform is not bound by traditional operating hours or geographical limitations and offers options for partial pre-funding or non-collateralized trading, thereby providing an unmatched level of flexibility and efficiency.

  • Capital efficiency: unlike funding methods with crypto exchanges, our solution is non-custodial and there is no requirement for 100% upfront funding. 

  • Scalable and Versatile: Our platform can easily accommodate new liquidity providers, making it a highly scalable and versatile solution for the fast-paced and ever-evolving crypto market.

Navigate the dynamic crypto market with confidence, and leverage the full potential of the crypto landscape with Finery Markets. Experience the benefits of our multi-dealer marketplace and optimize your crypto trading operations. Schedule a call with our sales team to learn more.

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