As Hubble Exchange moves to a Decentralized Limit Order Book on its own Subnet, Market Makers will be responsible for providing adequate liquidity on the limit order book.
But Market Making has been a mysterious trade…
What does a Market Making strategy do? A thread 🧵
Market Making strategies are often a combination of 1 or more types of MMing. Although these strategies may be used independently too.
First, let’s have a look at 3 MMing Strategy Types 👇
Directional
These express a directional view on the market, typically using technical analysis tools and indicators, such as RSI.
Directional making requires you to place a directional bet on the market when placing taker orders.
This means Risk ⚠️ in case your strategy’s thesis / prediction is incorrect.
🧑🏫 Tips:
- 🧱 Have a Risk Management Strategy in place.
- 🗞 Stay up to date on market news and adjust your positions as needed.
Market Making
In traditional Market Making, MMers don’t execute directional trades on the market. Instead, they profit most when the market doesn’t take a direction and stays within a range.
MMing is being short volatility.
MMers must maintain a two-sided liquidity profile; they must provide both buy and sell liquidity (bid and ask orders).
The profit is derived from the spread; the difference between your bid and ask price. This is the cost of a trade, paid by takers to makers.
When a taker buys a contract from you, you would sell from your long position and capture the spread as profit.
When a taker sells a contract to you, you would add to your short position and capture the spread as profit.
Arbitrage
If there is a significant price discrepancy between two exchanges, there may be an arbitrage opportunity.
An arbitrageur would initiate a position on the exchange selling perps below or above market and instantly hedge it on another perps exchange.
Thanks to the incentive mechanism traditionally found with perpetual futures to bring mark and index in-line, arbitragers may receive funding payments.
Read more about the funding incentive mechanism: MMing strategies can leverage a combination of these 3 strategies, such as:
Arbitraging + MMing = Cross Exchange Market Making
Providing liquidity on an exchange with less liquidity, while hedging on an exchange with more liquidity (tighter spreads).
This involves establishing a relatively wider spread (difference between your bid-ask orders) on the less liquid exchange, based on the spread available at the more liquid exchange.
When one of your orders is filled on the exchange with lower liquidity, you can offset it on the exchange with tighter spreads and book a profit from the discrepancy.
MMing is a competitive sport.
And competition is high for MMers in markets, such as Binance as more MMers operate there.
To play out your strategies, keep an eye out on novel exchanges, such as Hubble Exchange.
