Lesson about the importance of market-making from the flash crash of 2010
On November 11, 2011, senior NASDAQ executive described in an official testimony that a declining cost of launching and operating electronic order systems has led to an increase in the number of exchanges and trading venues. He mentioned such numbers as 11 exchanges and about 40 trading venues (as of 2019 there are already 80 ATS registered by SEC). He also mentioned that while such competition led to a reduction in trading costs for the top 100 issuers, at the same time, it did not provide enough liquidity for small and medium-sized projects. Such discrepancies eventually led to an infamous flash crash in 2010.
The lessons from traditional markets are important for the crypto industry as well. The explanation of the above crowding out effect in traditional markets includes the following: as the number of trading venues grew (nowadays there are more than 200 crypto exchanges) - the number of market makers essential for healthy trading and price discovery stayed the same. Partly, it is explained by the fact that modern market making for traditional trading technologies requires investment into human talent, technology and access to capital. Just take note of $300M spent on a cable between Chicago and New York to gain just 3 milliseconds speed boost over competitors.
This is a good thing, however, more and more market makers from traditional markets as well as advanced algo and HFT traders are coming to crypto space to provide market-making services.
Projects listed on the crypto exchanges should realize that while listing on crypto exchanges can be provided at a fraction of costs of traditional exchanges, at the same time market making is still the important part for a developing long term sustainable company.
It is also important that crypto space requires specific knowledge pertaining to new blockchain technology and ideal market makers for crypto projects should have solid experience working with crypto projects.
Additionally, due to advances in technology, the price of market making on crypto exchanges is much lower than on the traditional exchanges!
Please, contact us if you want to learn more about how LATOKEN experts can provide you with guidance on the market making on the exchange or become designated market maker on our exchange.
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