Improving trading efficiency with designated market makers | Image by Kelly Sikkema
Improving trading efficiency with designated market makers | Image by Kelly Sikkema
For token issuers and exchanges alike, working with a Designated Market Maker (DMM) is one of the most effective ways to raise the bar. These partners engineer liquidity, stabilize market dynamics, and create the conditions for scalable, institutional-grade execution.
Investors expect tighter spreads, deeper order books, and seamless execution across venues. DMMs sit at the heart of this transformation, quietly powering efficient markets behind the scenes.
In this article, we explore how DMMs drive measurable improvements in trading efficiency, and why they’ve become essential to any serious digital asset strategy.
Why trading efficiency matters more than ever
Crypto markets are 24/7, highly fragmented, and uniquely volatile. These characteristics create real opportunities, but also real frictions. For both issuers and exchanges, trading inefficiencies manifest as wide spreads, inconsistent liquidity, and delayed execution. Over time, this can erode trust, inflate costs, and turn away investors.
Efficient trading isn’t just about speed, it’s about quality:
- Tighter spreads reduce transaction costs.
- Deeper liquidity allows for the absorption of large trades without significantly impacting the market.
- Reliable execution enables price discovery and investor confidence.
In a competitive landscape, tokens and platforms that provide efficient execution win attention, volume, and long-term traction. Designated Market Makers play a crucial role in making that happen.
How designated Market Makers enhance trading efficiency
In our previous article, we explored the fundamental role of a Designated Market Maker (DMM) in providing continuous bid and ask quotes. We now take a closer look at how DMMs impact overall trading efficiency.
DMMs are contractually committed to maintaining tight bid-ask spreads, often within a specified percentage. This keeps trading friction low, especially for smaller trades. On exchanges where spreads can exceed 5–10% for less liquid tokens, a DMM can reduce that to under 1% - and often to 0.2–0.5% on major pairs. This pricing consistency enables institutional participants to enter and exit positions with confidence.
By populating multiple levels of the order book, DMMs provide real depth, not just surface liquidity. This supports larger trades without a dramatic price impact and improves price discovery. For newer tokens or smaller exchanges, depth management is critical to building credibility and attracting larger players.
Efficient markets rely on accurate and timely pricing. By ensuring liquidity at a range of price levels, DMMs enable more trades to occur and more data points to inform price discovery. This leads to tighter convergence between fair value and trading price, especially during volatile conditions or initial price formation.
Institutions often avoid smaller markets due to execution risk. Without sufficient depth, even modest orders can significantly impact the price. DMMs help solve this by absorbing trades at multiple levels. This stabilizes pricing and reduces the fear of slippage—a core requirement for institutional flows.
In periods of market stress, many participants pull orders or widen spreads. DMMs, however, are contractually obligated to maintain activity, even during high volatility. Their presence becomes a stabilizing force, preventing disorderly price gaps and supporting continuous execution.
Trading efficiency at launch: The critical window
The first 30 to 90 days after a token launch or new exchange listing are crucial. This is when:
- Price discovery happens
- Investor sentiment is shaped
- Early media and analyst attention converge
Without strong trading efficiency during this window, even promising projects risk a negative perception. DMMs help ensure:
- Order books are balanced
- Spreads stay tight from day one
- Liquidity scales with interest
- Early whales or bots don’t distort prices
According to TokenInsight, tokens with professional market making at launch see up to 3x higher trading volume in the first 30 days compared to those without. For exchanges, listings with active DMM support retain users longer and convert more deposits into trades.
DMMs and cross-venue liquidity synchronization
In 2025, tokens rarely list on a single exchange. Yet fragmented liquidity across CEXs and DEXs leads to inconsistent pricing and execution. DMMs help bridge this gap by:
- Mirroring liquidity across venues
- Arbitraging price discrepancies
- Using smart order routing and shared inventory to avoid fragmentation
This cross-venue harmonization improves user experience, reduces arbitrage leakage, and enhances capital efficiency for the token issuer.
Selecting the right DMM for your project
Every market maker isn’t the same, and choosing the right one can mean the difference between sustained success and stalled momentum. Here’s how to evaluate potential partners:
1. Technical infrastructure
- Do they use low-latency infrastructure?
- Do they support multiple venues?
- Can they integrate APIs efficiently?
2. Track record
- Have they supported major listings?
- Can they share case studies or references?
- Do they have proven results in volatile environments?
3. Transparent KPIs and reporting
- Are spreads, uptime, and volume targets clearly defined?
- Do they offer regular reporting?
- Is performance independently auditable?
4. Regulatory alignment and reputation
- Are they compliant with local and global regulations?
- Do they follow fair market practices (no wash trading)?
- Do tier-1 exchanges recognize them?
5. Strategic fit
- Are they aligned with your long-term goals?
- Do they understand your tokenomics and roadmap?
- Can they offer market insights beyond liquidity provision?
Look for firms with experience supporting institutional-grade listings and who operate under service-level agreements with transparency baked in.
Efficiency is a competitive advantage
In digital markets, trading efficiency is a core performance driver. Tokens with reliable liquidity attract capital. Exchanges with efficient execution attract users. And projects backed by a designated market maker that delivers measurable trading efficiency gain a clear edge.
For any institution entering or scaling in crypto, it’s time to think beyond exposure—and focus on execution. DMMs aren’t optional infrastructure; they’re strategic allies in building modern, resilient, and investable markets.
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The full breakdown
In our first article, "Navigating Crypto Volatility: The Advantages of Active Management," we explored how the high volatility and low correlation of digital assets with traditional asset classes create unique opportunities for active managers. We discussed how these characteristics enable active managers to execute tactical trading strategies, capitalizing on short-term price movements and market inefficiencies. Building on that foundation, we now turn our attention to the unique market microstructure of digital assets.
Conducive market microstructure of digital assets
The market microstructure of digital assets - a framework that defines how crypto trades are conducted, including order execution, price formation, and market interactions - sets the stage for active management to thrive. This unique ecosystem, characterized by its continuous trading hours, diverse trading venues, and substantial market liquidity, offers several advantages for active management, providing a fertile ground for sophisticated investment strategies.
24/7/365 market access
One of the defining characteristics of digital asset markets is their continuous, round-the-clock operation.
Unlike traditional financial markets that operate within specific hours, cryptocurrency markets are open 24 hours a day, seven days a week, all year round. This continuous trading capability is particularly advantageous for active managers for several reasons:
- Immediate response to market events: Unlike traditional markets that close after regular trading hours, digital asset markets allow managers to react immediately to breaking news or events that could impact asset prices. For instance, if a significant economic policy change occurs over the weekend, managers can adjust their positions in real-time without waiting for markets to open.
- Managing volatility: Continuous trading provides more opportunities to capitalize on price movements and volatility. Active managers can take advantage of this by implementing strategies such as short-term trading or hedging to mitigate risks and lock in gains whenever market conditions change. For instance, if there’s a sudden drop in the price of Bitcoin, managers can quickly sell their holdings to minimize losses or buy in to capitalize on the lower prices.
Variety of trading venues
The proliferation and variety of trading venues is another crucial element of the digital asset market structure. The extensive landscape of over 200 centralized exchanges (CEX) and more than 500 decentralized exchanges (DEX) offers a wide array of platforms for cryptocurrency trading. This diversity is beneficial for active managers in several ways:
- Risk management and diversification: By spreading trades across various exchanges, active managers can mitigate counterparty risk associated with any single platform. Additionally, the ability to trade on both CEX and DEX platforms allows managers to diversify their strategies, incorporating different levels of decentralization, regulatory environments, and security features.
- Arbitrage opportunities: Different venues often exhibit price discrepancies, presenting arbitrage opportunities. For example, managers can buy an asset on one exchange at a lower price and sell it on another where the price is higher, thus generating risk-free profits.
- Access to diverse liquidity pools: Multiple trading venues provide access to diverse liquidity pools, ensuring that managers can execute large trades without significantly impacting the market price.
Spot and derivatives markets (Variety of instruments)
The seamless integration of spot and derivatives markets within the digital asset space presents a considerable advantage for active managers. With substantial liquidity in both markets, they can implement sophisticated trading strategies and manage risk more effectively.
For instance, as of August 8 2024, Bitcoin (BTC) boasts a daily spot trading volume of $40.44 billion and an open interest in futures of $27.75 billion. Additionally, derivatives such as futures, options, and perpetual contracts enable managers to hedge positions, leverage trades, and employ complex strategies that can amplify returns.
Overall, the benefits for active managers include:
- Hedging and risk management: Derivatives offer a powerful tool for hedging against unfavorable price movements, enabling more efficient risk management. For instance, a manager holding a substantial amount of Bitcoin in the spot market can use Bitcoin futures contracts to safeguard against potential price drops, thereby enhancing risk control.
- Access to leverage: Managers can use derivatives to leverage their positions, amplifying potential returns while maintaining control over risk exposure. For instance, by employing options, a manager can gain exposure to an underlying asset with only a fraction of the capital needed for a direct spot purchase, thereby enabling more capital-efficient investment strategies.
- Strategic flexibility: By integrating spot and derivatives markets, managers can implement sophisticated strategies designed to capitalize on diverse market conditions. For instance, they may engage in volatility selling, where options are sold to generate income from market volatility, regardless of price direction. Additionally, managers can leverage favorable funding rates in perpetual futures markets to enhance yield generation. Basis trading, another strategy, involves taking offsetting positions in spot and futures markets to profit from price differentials, enabling returns that are independent of market movements.
Exploiting market inefficiencies
Digital asset markets, being relatively nascent, are less efficient compared to traditional financial markets. These inefficiencies arise from various factors, including regulatory differences, market segmentation, and varying levels of market maturity. For example:
- Pricing anomalies: Phenomena like the "Kimchi premium," where cryptocurrency prices in South Korea trade at a premium compared to other markets, create arbitrage opportunities. Managers can exploit these by buying assets in one market and selling them in another at a higher price.
- Exploiting mispricings: Active managers can identify and capitalize on mispricings caused by market inefficiencies, using strategies such as statistical arbitrage and mean reversion.
The unique aspects of the digital asset market structure create an exceptionally conducive environment for active management. Continuous trading hours and diverse venues provide the flexibility to react quickly to market changes, ensuring timely execution of trades. The availability of both spot and derivatives markets supports a wide range of sophisticated trading strategies, from hedging to leveraging positions. Market inefficiencies and pricing anomalies offer numerous opportunities for generating alpha, making active management particularly effective in the digital asset space. Furthermore, the ability to hedge and manage risk through derivatives, along with exploiting uncorrelated performance, enhances portfolio resilience and stability.
In our next article, we'll delve into the various techniques active managers employ in the digital asset markets, showcasing real-world use cases.
