around a moving average of the priceThe idea is that the price will ‘walk through’ the orders throughout the day, earning the spreads between buys and sells.The most painful risk of market making is known as theInventory means a particular amount of assets a market maker has to store to be able to fill a buy/sell order.. In other words, instead of fluctuating sporadically, which is probably the best-case scenario for a MM, the price begins consistently going in a particular direction..
At the end of the day, the market maker would be forced to stop his operation and wait for better prices or start selling his inventory at a loss to keep his operation going. So summing up, the inventory risk is the probability a market maker can’t find buyers for his inventory, resulting in the risk of holding more of an asset at the wrong time. Another scenario is when a market maker has to sell assets too early while their prices are rising.
The inventory risk is inevitable in any market-making, whether it’s done on the traditional or crypto markets. However, its probability dramatically increases when it comes to crypto, as crypto assets are way more volatile than their conventional alternatives.Most cryptocurrency exchanges operate off-shore and therefore sidestep the supervision of a regulatory watchdog. Therefore a market maker needs to be extra cautious while considering professional engaging with a particular crypto exchange.
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