The past of market makers: the "love and hatred" between market makers, project parties, and exchanges
Original author: Guangwu, founder of Canoe
The former head of trade of FTX, immediately @octopuuus, mentioned in the podcast that a perspective I am interested in is the perspective of market maker institutions, "the old story of dealers lol".
I will first summarize the aggressive market maker style of Alamenda he mentioned, and then add some other models I know in the last cycle, especially the relationship between the project party and the market maker. The market maker mentioned in this article only refers to the part of the business associated with the exchange and the token of the project party.
Institutional perspective
From an institutional perspective, there are two main ways to make a token chip:
Strong control panel
When the fundamentals of the project pass, choose a target to start the operation (the project party may or may not know, it doesn’t matter much)
Stage 1 Accumulation: A typical market is low prices and continuous accumulation.
The second stage is the consensus stage of market maker institutions.The main indicator at this stage is the trading volume. First pull up a band, and then change hands with other market makers in the shock (recovering costs, improving capital utilization, and establishing a risk control model)
The third stage is the stage of cutting leeks.Further increase, while shipping to recover funds, while boosting, some institutions will spontaneously assist the project side in fundamental construction in this step.
Make a value anchor for the target
This is to quickly improve the fundamental quality of the project in terms of capital and transaction volume.
The best means are loans and derivatives.
The example shared by @octupus is borrowing, such as borrowing btc/eth by collateralizing ftt, then the value anchor of ftt is btc and eth, and the revolving loan adds leverage, and it is even possible to pull the borrowed btc/eth to ftt.
In addition, there are relatively professional futures (which can be used as margin, not perpetual contracts), options,This is relatively complicated. In the bull market, market makers in the currency circle don’t even need to use this weapon too much, and they can complete the banker.
The relationship between the project party and the market maker
From the perspective of the project side, the relationship between the project and the market maker probably has the following types (from the top to the ordinary studio):
1. If the project party actively seeks listing, CEX will have requirements for market makers:
Some exchanges even designate some market makers. In the listing stage, market makers can help a lot, which is one reason why many project parties like to invest in MM in the last cycle.
Market-making accounts have margin requirements, such as token + usdt not less than 150,000 U.S. dollars, which can generally be bargained.
2. Terms of large market makers:
One type is a passive market maker (there are more such styles in Europe), which is to help provide strategies and technical support. One strategy manages hundreds of project parties, and the monthly fee may be 3000-5000 US dollars / month
One is technical service fee (about 6,000 USD/quarter) + profit sharing (more of this style in China). Sharing refers to the profit sharing of selling tokens. For example, if you sell goods for 1 million US dollars, then you will get 37 cents. This type of market maker has certain interests bound to the project party, but the market maker holds the initiative. When communicating terms, a key indicator is the reserve ratio: market-making reserve funds/circulation market value. If you want to control the market, generally this ratio should be around 30% to 50% to prevent the stock market from collapsing (falling below the private placement price) risk.
The other is a common method used by US market makers. Loan terms, such as borrowing 3% of the token from the project party, and repaying the principal and interest at the agreed price after maturity. This kind of clause is illegal in the United States, so the clause generally explains the difference from American securities and clears up responsibilities. The initiative is still on the side of the market maker, he can choose to return the token or usdt. The right to speak of the project party is relatively small.
Returning tokens is easier to understand, and you can pay back whatever you borrow. If there is still usdt, there is a difference: some top market makers will return usdt according to the price of the investment round (maybe slightly increased). If the exchange price is much higher than the private placement round, the profit of the market maker is very terrible. Some market makers are relatively friendly. According to the agreed date, Binance Exchange will return the average price of the day to the project party usdt. The definition of average price is generally daily volume weighted average price.
Superpower in the last cycle: private equity round investment + borrowing a large number of tokens from the project party at the price of the private equity round. According to the above analysis, the market maker chooses to return usdt to maximize profits. For example, if the price of the private equity round is increased by 100 times and sold, the profit will be 100 times. In a sense, this is buying an American call option at a low cost (or even zero cost). The higher the pull, the greater the value of the option. American finance corresponds to Liquidity Service Level Agreements (SLAs), which strictly prohibit such terms.
3. Small market makers are relatively simple (there are also project parties and incubators, who have their own market-making teams, and the scythe in the currency circle often refers to this):Fees are mainly charged, and he will do whatever the project party says. Generally, the asset table will be synchronized for you once a day, and some suggestions and ideas will also be given. Unlike big market makers, they basically have good communication with project parties. After all, they manage too many projects and mainly make markets passively.
4. The best choice for the project party is to be forced by the exchange and cut off by the market maker. projectFang only cares about his own build, and silently ships the goods, making a fortune in silence. When the transaction volume is high, it is not difficult for the bull market to reach a transaction volume of 100 million U.S. dollars on Binance, and the project party’s daily output of 1 million U.S. dollars has no effect on the market. From this, we can know why the project party does not care about the quality of vc in the middle of the bull market, and just wants to be listed on the exchange as soon as possible. For example, in the gamefi wave in Vietnam, the VC in the tge wave directly paid back even ten times, and the capital turnover efficiency was very high. Even within a month, the funds will be withdrawn, and then the bear market will slowly invest in good projects. But it's easy to play.
5. Supplement the disadvantages of being cut off.The project party may lose money. If the project party uniformly hosts the vc’s bargaining chips and sells them all at a low price, and then is cut off by the market maker, then the project party may have to post money to the hosted vc by itself. What’s more, if you put your head into the build, the token was pulled 100 times, but it didn’t come out, and the problem with the product later returned to zero. Market sentiment has pushed the price up by 50 times. Retail investors who take orders at this price will scold the project party for a year. In fact, it is basically the market maker (Yezhuang) who does it, and the project party has nothing to do with it. As mentioned earlier, generally project parties with good fundamentals are disciplined, and the chips are open and transparent, and they will not mess around. If they mess up, no funds are willing to intervene in the token of this project party.
Of course, market makers are not evil, they are pure capital transactions. The market makers I introduced are all active market makers. If they are market makers without primary investment business, they simply adjust their strategies according to the market, and they are flat and rarely take any action. If the market is a river bed, then market makers are at one end of the water supply. It is normal for the project party to have a weak voice in front of market makers. In the secondary financial market, the water source of the food chain is these market makers.But at the end of the day, they also have their water sources, and they lose money, make money and go bankrupt.
Relationship between market makers and exchanges
The exchanges have been mentioned above, and here I will add the shadow banking system composed of market makers and exchanges:
At present, when the liquidity in the bear market is exhausted, leading exchanges will frequently contact market makers, begging them to help with market making and provide liquidity. Because liquidity is the most fundamental infrastructure of an exchange.
Back to the bull market. With such a large profit in the exchange, why should it misappropriate customer assets and expand the balance sheet? A large part of the exchange's balance sheet is the unsecured loan credit line for market makers, and market makers use this fund to continuously increase liquidity, and some even increase leverage to bring sufficient liquidity. This is equivalent to granting market makers the right to misappropriate client assets. When we were surprised by the huge liquidity in 2021, we felt that these institutions were the saviors of the secondary market. When the real storm hit, we found that it was we who provided the liquidity Retail investors themselves.
Exchanges generally provide market makers with a lot of convenience: no handling fees, no mortgage loans, and low interest rates. Why are market makers/hedge funds (such as 3AC) willing to pay more than 10% interest per year when borrowing in 21/2, because some of these interest rates are paid by exchanges, not market makers. For liquidity, some exchanges often give market makers unsecured loans to replace liquidity management costs.
The past of market makers: the "love and hatred" between market makers, project parties, and exchanges
FTX&Alamenda operates this system to the extreme. When the exchange directly recharges the market maker for liquidity (the method of misappropriating customer assets), the mine will be very large and affect every user. After the FTX explosion, market liquidity plummeted by more than 50%.
In general, the liquidity of exchanges relies on market makers, who print money (unsecured loans) on the exchanges while increasing leverage to bet, leading to many financial storms/shadow bank debt crises, and this loan happens to be It is from the principal of the client.
Future: The relationship between market makers and AMMs
Of course, these are some scripts from the last cycle, and no one knows what will happen in the next cycle. For example, many new ventures in 2022 have set up hedge fund departments to get rid of the profit squeeze of the market maker system.
Regarding the relationship between the project and the market maker, there were some interesting things in the last cycle. One of the projects I prefer is Merit Circle, which directly raised 105 million US dollars through LBP, and then opened it to do LP mining on UNI V2/3. In the top ten, second only to ETH/USDC, its depth can be imagined. Moreover, I have raised enough money in LBP, so it doesn’t matter whether I am listed or not, but with such a large transaction volume, I was forced by Binance. At present, the treasury assets disclosed by the game union still have 100 million US dollars during the deep bear period. The address is supervised by everyone and updated in real time every day.
LBP was originally a fair launch, and later became an excellent tool for project realization and exit when the market was good: without the intervention of market makers, it can also be profitable, getting rid of the exchange-market maker profit system, and at the same time LBP ends There is nothing wrong with the exit of the final flow pool as a VC.
Radical market makers have gone through this round of thunderstorms, and the market maker business within the exchange in the next cycle should undergo a major change. Around the market maker business, what methods can be used to decentralize related businesses? It will be a very interesting issue to divide permissions and assets on the chain. In the last cycle, centralized market makers became familiar with the DEX system. At the same time, some mainstream aggregation DEXs have introduced RFQ functions to serve professional market makers. Hashflow, which was recently listed on Binance, is also a DEX that focuses on RFQ. It’s just that the threshold for traditional real businessmen to enter the DEX field is still relatively high, and it even takes 2-3 months to get familiar with it before they dare to use funds for MM market making. At the same time, delays and performance problems on the chain will still make many Policy fails. I predict that in the next cycle, a high-performance chain-based trading engine and engineering implementation without solidiy/vyper language restrictions will further promote professional market makers to establish liquidity in the DEX field and transfer pricing power from CEX to DEX.
Another consideration is about market makers using AMMs to make markets.For market makers, AMM is a passive convex curve, a passive convex function curve, coupled with impermanent losses, it is difficult to pull and control the market.After v3 comes out, it is a little more friendly, but it needs to move the price range frequently, and it is difficult to manage market making. izumi manages the functions of v3 discretized, but even after discretization, it is still a passive convex curve in that section of the definition domain, so managing liquidity based on discretization cannot achieve active market making and market control.
postscript
postscript
The above is the information about market makers that I know, and the small suggestions that can be brought about in operation may be to choose those open and transparent targets, as well as those that have been screened and evaluated on large platforms and can be used as pledges and margins. target.
When I originally sorted out this information, I was only inspired by @octupus, but as I wrote it, I couldn't help but think of what I saw on the Internet and those around me. They may be weak young people who shoulder the burden of the family, husbands and fathers who want to improve the lives of their wives and children a little; Another son of a lie, an ordinary person who never even has the chance to repent. They just pour their dreams, life, and family into such a board game with no rules, and they may end up disillusioned.
For market makers, it is a business;
For retail investors, it is their whole life;
In fact, this is not the case for project parties who choose to bind with market makers from the beginning. "Users are not just users, but also buyers." But in the end, it will still be backfired.
