Original author: Matthew Lee
Recently, it was revealed that BlackRock is seeking top market makers such as Jane Street and Jump Trading to discuss potential cooperation, hoping to help BlackRock make markets after the Bitcoin spot ETF is approved in the future. The possibility of potential cooperation between market makers and BlackRock has once again aroused public confidence in the market recovery. Especially after the bankruptcy of FTX last year and the collapse of crypto banks Signiture and Sivergate this year, market liquidity has continued to dry up.
Since regulatory investigations into cryptocurrencies were launched in June this year, the market has become increasingly fragile. More people are beginning to point to regulatory uncertainty, which has led market makers such as Jump Trading and Jane Street to gradually withdraw from the cryptocurrency market, resulting in liquidity drying up.Industry giant Coinbase also revealed in its latest financial report that the withdrawal of market makers has led to the loss of a large amount of trading volume.。
Source：Coinbase Q3 Earnings
According to data from KaiKo, from early July to mid-August,1% market depth is reduced by about 15%, the importance of market makers to the market is self-evident.
* 1% market depth means that when the trading volume reaches a certain amount, it can increase the asset price by 1%. As shown in the figure below, it takes $400M to increase the price by 1% in early July, but only $320M is needed in mid-August. That is Can.
Source: Kaiko Research
As market depth gradually weakens, any disturbance will lead to sharp fluctuations in asset prices. For example, in August, Evergrande announced bankruptcy protection, Tesla liquidated a certain amount of Bitcoin in the past quarter, and other minor negative news have caused BTC prices to fluctuate. A drop of more than 16.7%. In October, fake news passed by the Bitcoin Spot ETF could cause the entire market to rise by nearly 17% in an instant. These seeminglyThe main reason for irrational surges or plummets is the withdrawal of liquidity from market makers.。
Therefore, not only BlackRock, but every ETF management company will actively hire market makers to help reduce the impact of large ETF transactions or concentrated trading orders in a short period of time on ETF prices. Especially for a less active ETF, no other investors are willing to buy it on a certain day. If no market maker intervenes, the slippage may increase significantly, so that the transaction price can only be completed at 10% of the recent market price. This could cause the price of ETF shares to drop by approximately 90%.
In addition to providing liquidity, the most important significance of market makers also includes the following two points:
When asset prices fluctuate significantly,Market makers take contrarian actions to provide ETF stability。
A market maker provides $10M of liquidity for a certain digital asset. When the price of the asset increases by 10%, the market maker holds a long position worth $8M. While the asset may continue to rise towards 8%, market makers may start increasing sell orders and reducing buy orders at 5% for risk management reasons. (If you don’t do this, assuming that the market maker still has a position of $8M at 8%, the stock price begins to correct, traders in the market start to sell stocks, and the market maker can only buy, the position will rush to 10M The above results in the market maker being unable to clear out the positions on hand.) This reverse operation helps slow down the speed of price fluctuations.
Arbitrage allows the value of ETFs toReflect the true price of the underlying asset。
Bitcoin transactions are open 24/7, while ETFs in the US stock market will only have sufficient liquidity within a certain period of time. When liquidity is lacking, the NAV of the ETF cannot reflect the true asset price of BTC, which causes the ETF and The price difference in the spot market, and the arbitrage behavior of market makers can significantly reduce the price difference.
Market makers not only provide crucial liquidity and active oversight for ETFs;Plays a key role in the creation and redemption process of ETFs, ensuring that the price investors pay when buying or selling reflects the value of the Bitcoin in the ETF.
Like stocks, ETFs operate primarily in the primary and secondary markets. In the primary market, BlackRock first issues a large amount of Bitcoin to authorized participants (also known as Authorized Participants, APs) in exchange for ETF shares. After receiving the ETF unit assets (Bitcoin),Authorized participants in turn act as market makersand enable ETF units to be traded in the secondary market. Investors can trade ETF units on an exchange each trading day with market makers or other investors, just like stocks. As shown below:
How can ordinary users participate in ETF benefits with market makers?
As can be seen from the above figure, the primary market activities of spot ETFs account for the main part of issuance, and a large number of institutions are required to participate in the process of creating and redeeming ETF shares. For example, withCustody business based on Coinbase, Bank of New York Mellon, Paxos and other institutions,They can indirectly provide ordinary investors with a safer way to store and manage digital assets. Ordinary users can gain income by investing in custody service providers. For example, Coinbase still rose by more than 8% on the day of financial report disclosure despite a net loss in the third quarter.
Or maybe itsCompliance business based on on-chain data companies such as OKLink, Chainalysis, Elliptic, etc., to help financial institutions and regulators identify and track the compliance of digital assets. For example, tools are provided to help custody companies or fund management companies verify the source of digital assets and ensure that funds will not violate anti-money laundering regulations and be subject to regulatory penalties.
Ordinary users can not only participate in the upstream industries of ETFs for investment layout, but also use tools provided by on-chain data companies, such as the OKLink browser function, to browse and monitor the transactions and capital flows of publicly available ETF-related wallet addresses, and more It is better to observe the capital dynamics of the underlying assets to ensure that they have a clearer understanding of and participation in the digital asset market and blockchain ecosystem, better manage risks, and improve the rationality of investment decisions.
write at the end
Market makers play a vital role in the cryptocurrency field. They contribute to the development and promotion of new projects, while also reducing transaction costs and improving transaction efficiency. The improper behavior of some new market makers has aroused the markets resistance to market makers, who are considered to be bookmakers that undermine market fairness. Based on this, market makers also need to comply with industry and regulatory norms and maintain their reputation in order to win the support of the market and compliance.
refer to
Jump Trading 13 F annual report，
https://wallmine.com/fund/3mg/jump-trading-llc#google_vignette
Management of ProShares Trust，
Do market makers in the U.S. stock market affect stock prices?
https://www.gelonghui.com/p/46676
Proshare Trust Registration Statement,
https://www.sec.gov/Archives/edgar/data/1174610/000168386321004445/f9424d1.htm
