An order book can look liquid, but the real question is who is posting the bid and ask prices. Does an exchange admit several independent market makers, or does virtually all liquidity come from a single affiliated party? That difference affects spreads, price discovery, resilience and potential conflicts of interest.
What does a market maker do?
A market maker continuously posts buy and sell orders. The difference between the two prices is the spread. In return for the risk that prices move while orders are being executed, the market maker tries to earn part of that spread.
Good market making usually delivers:
- smaller differences between bid and ask;
- more available liquidity around the market price;
- less price impact on larger orders;
- faster alignment with prices on other trading platforms;
- a more orderly order book during normal market conditions.
Why several parties are better than one
Competition between market makers forces every party to quote sharper prices. A maker with too wide a spread or too little volume is passed by another.
Several independent liquidity providers also reduce concentration risk. If one party has an outage, lowers its risk limits or withdraws during volatility, the entire order book does not have to empty out immediately.
The number of market makers is not enough on its own, incidentally. Ten names that are ultimately steered by the same owner, credit line or technology offer less diversity than they suggest on paper.
What if external market makers are not admitted?
A closed model is not automatically fraudulent. A broker can, for example, act as counterparty itself and explain clearly in advance how prices are formed. The risk arises when a platform presents itself as an open exchange while users cannot establish:
- who the main counterparty is;
- whether an affiliated party has priority or an information advantage;
- how the reference price is determined;
- whether external parties are given access on objective terms;
- whether the operator benefits economically from customer losses.
Without independent competition, a spread can stay artificially wide. It also becomes harder to assess whether the price really comes about through supply and demand or is largely set by a single internal liquidity source.
Market maker versus internal trading desk
These terms are often confused.
An independent market maker trades on its own account, but is legally and operationally separate from the exchange. It should use the same market data and matching rules as comparable participants.
An affiliated market maker has an ownership or group relationship with the platform. That does not by definition have to be wrong, but it requires strong separation of duties and transparency.
An internal proprietary trading desk is part of, or directly connected to, the operator and trades on its own account. When such a desk has access to non-public orders, positions or liquidation levels, a far more serious conflict arises.
What does MiCA say?
MiCA requires the rules for participation in a crypto trading platform to be objective, non-discriminatory and proportionate, and to promote fair and open access. The operator may not deal on own account on its own platform. Matched-principal trading is permitted only where the client consents to it and the regulator receives information about its use.
In addition, crypto providers must identify, prevent, manage and disclose conflicts of interest. That is relevant in cases of vertical integration: one group that is exchange, broker, custodian, token issuer and liquidity provider all at once.
What data should a good exchange publish?
ExchangeFacts should not assess market structure on marketing claims alone. Relevant measurement points are:
- the number of active independent market makers per main market;
- the share held by the largest liquidity provider;
- objective admission criteria;
- any ownership relationships with liquidity providers;
- latency and market data rights per participant category;
- the presence of last look, internalisation or matched-principal trading;
- average spread and order book depth, including during stress;
- availability of historical trades and order book data;
- the policy on conflicts of interest and proprietary trading.
Not all of this data will be public. The absence of disclosure can therefore be shown as a separate transparency signal in its own right, without automatically assuming misconduct.
The practical test for traders
Do not look only at the volume an exchange reports itself. Compare:
- the spread at the same moment against other exchanges;
- the depth at 10, 25 and 50 basis points from the mid price;
- the price impact of a realistic order;
- how quickly the order book recovers after a large trade;
- how spreads react during volatility;
- whether prices move independently or follow one external market with a lag.
An order book with a lot of flickering orders can look busy and still contain little executable liquidity.
ExchangeFacts Verdict
Independent market makers are no guarantee of a fair exchange. They do not make manipulation, outages or conflicts of interest impossible. But open and equal access does create competition and makes pricing easier to verify.
The most important question is therefore not: “Does this exchange have a market maker?” The better question is: “Can several independent parties compete under the same rules, and can the operator demonstrate that no one has access to information or execution that stays hidden from other participants?”
Sources
- MiCA, Article 76: operation of a trading platform for crypto-assets
- ESMA, Article 72: identification, prevention, management and disclosure of conflicts of interest
- ESMA: final MiCA rules on conflicts of interest