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It is with great pleasure to be a participant in this week assignment of professor @reddileep which he taught about **_IN DEPTH STUDY OF MARKET MAKER CONCEPT_**, I can say I understood the class and I have been able to give back based on my own understanding and the research I made. I stand corrected in any way as I might have come short in details of a particular question.
## 1- Define the concept of Market Making in your own words.
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A Market Maker is an individual, a group of individuals, or an entity that places **Bid and Ask Orders** in a market. They quote their own price in the market. Their orders are not filled at the current market price, because they determine their price level to the exchange. They make purchases at the Bid price and make an offer at the Ask price.
They do this to provide liquidity and ensure that the trading volume for the market is high so that trading activities can go on smoothly. They also make profits from the spread of the market. They can also place trades using their own accounts which are commonly known as Principal trades.
A *Limit Order* is used to achieve the price levels that the market maker wants to Buy or Sell an asset in the market. When the Limit Order has been placed they are grouped together on the Order Book until they are filled.
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 <center> <sub> Order Book | [Binance](https://www.binance.com/en/trade/BTC_USDT?layout=basic) </sub> </center> </center>
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The Order Book has both Buy and Sell Limit Orders placed by the market makers. The image above is a graphical representation of an order book. At the top in the blue shape is the Sell Limit Orders placed and at the bottom in the orange shape is the Buy Limit Orders. Both types of Limit Orders have been placed by market makers.
Because of the actions of market makers by placing limit orders, the limit orders are waiting to be filled. Once a market order has been placed by a market participant, the market maker through the limit order that was initially placed ensures that the market order is completed.
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## 2- Explain the psychology behind Market Maker. (Screenshot Required)
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Market Makers place orders (Limit) at the price levels that they decide to create a market in. They usually place buy limit orders at a price lower than the current best buyers and at the same time create a sell limit order at the current best sellers. The aim of making such orders is to create liquidity. Within the buy and sell limit orders created, market participants who are active take these prices and make trades by placing *Market Orders*. The market participants who take these prices are known as **Market Takers**.
 <center> <sub> Market Maker Orders | [Steemitwallet](https://steemitwallet.com/@olabillions/transfers) </sub> </center> </center>
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For instance, in the STEEM/SBD marketplace a market maker placed a buy limit order at $0.084794 and then placed a sell limit order at $0.084892. Through these limit orders placed by the market makers, they have ensured that there is liquidity in the marketplace. Then at these prices set by the market makers, the market takers would engage in buying and selling activities. This buying and selling activity is made possible through the liquidity provided by the market makers.
The limit order is then placed in the order book waiting to be executed. The only way they are executed is when the market taker places a market order within the price that has been set by the market makers. The blue shape shows the lists of limit orders that have been placed by the different market makers providing liquidity. The yellow shape shows the record of the market order that has been executed at the price created by the market makers. This is known as *Trade* and is shown in the Trade history.
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To add to the psychology behind the market maker, there is another set of people that has a share in the markets. Their share is significant, and they use it to manipulate the markets so that they can extort money from small traders and investors. In the cryptocurrency market segment, they are known as **Whales** and their actions are known as **Whale Manipulation**. They manifest their manipulation skills when they try to fall down the price of an asset by putting much pressure on selling the asset and then when the markets takers start to sell too, they go behind and start buying the asset back, thus buying at the market's dip! These sets of people also contribute to the market maker concept, but they are more dangerous than just being liquidity providers.
So it is necessary for traders to be highly proficient in their trading skills and operations so as to enter the market and exit the market at the right time.
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## 3- Explain the benefits of Market Maker Concept?
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**1. Helps to Provides Liquidity to the Markets:** The market makers provide liquidity to the markets through the orders that have been placed by them. Through this market participants (takers) can easily make trades on the markets.
**2. Make Trades to be Run Without Frictions:** As the market makers provide liquidity to the markets, they ensure that the execution of trades is done successfully. Without the market makers execution of trades can prove to be very difficult.
**3. Helps to Stabilize Spreads of an Asset:** The difference between the Bid and Ask price is called a *Spread*. The higher the liquidity in a market the thinner the spread, and the lower the liquidity in a market, the wider the spread. As the market makers provide more liquidity to the market, they also help to stabilize the spread.
**4. An Increment in the Number of Market Participants:** The influence of the market makers ensures that the market has value. This value would then entice a large number of smaller investors and some large investors who have become interested in the asset.
**5. Gives Small Investors Points of Market Entry:** Due to the effect of the influence of the market makers by providing liquidity, which reduces the spread. It allows small investors to have good market entry points. If the spread is wide it discourages smaller investors from partaking in the market as they don't have the funds to do so.
**6. Profits for Smaller Investors who make use of the Concept of Market Making:** A small investor can decide to learn and understand the concept and rigor of market-making. Doing this would let them make profits from the spreads generated by engaging in market-making activities.
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## 4- Explain the disadvantages of Market Maker Concept?
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**1. Manipulating the Market:** Market makers can manipulate the price of the market. When this is done smaller investors can get enticed and decide to follow the current pattern of the price and then make a market entry. Then later on the investor finds out that the price has reversed which has affected his market entry and his trading account.
**2. Providing Artificial Liquidity:** There are markets where the activities of a market maker are unregulated. In such markets, the market makers provide artificial liquidity, and it's usually for a short time.
**3. Weak Identification of Market Maker's System:** All the investments made by smaller investors and traders can be in the possession of market makers if the smaller investors and traders don't do a good analysis of the system used by a market maker.
**4. Unfavorable Spreads:** The market makers can sometimes give spreads that are not favorable to smaller investors.
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## 5- Explain any two indicators that are used in the Market Maker Concept and explore them through charts. (Screenshot Required)
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Market Makers are aware of the trading indicators that are used by smaller investors. So they try to produce fake signals using these indicators. Though they cannot on their own control the market how they like, they can, however, give the market a push to a certain price level that they want. In this exercise, I would be discussing two indicators that market makers use to falsify signals.
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**Bollinger Bands**
Bollinger Bands is an indicator that is used for measuring market swings. It is categorized as a volatility-based indicator. It consists of a moving average and a standard deviation. Its default settings are a 20-day moving average and 2 standard deviations. One of the ways by which signals are interpreted is through the breakout of candlesticks from one of the bands. If the candlestick should break out from the upper or lower band, it usually gives signals of an imminent trend reversal.
 <center> <sub> Illustration of Market Making Concept | [Tradingview](https://www.tradingview.com/chart/iAELFmGM/) </sub> </center> </center>
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The image above shows is a 4 Hour chart of LUNAUSDT when the Bollinger bands experienced a breakout. The candlestick broke out of the Bollinger band at 11.40 USDT. The market continued its movement in the breakout zone to 9.23 USDT. Then the market maker came in and produced buying liquidity by pushing the market upwards until the price went back up to 11.43 USDT.
At this point other market participants saw this as a signal for a big uptrend then they decided to buy more of the LUNA coin. Because the market maker has generated enough buying liquidity he then sells all the LUNA coins owned through this large buying pressure. This, later on, had an effect on the market and it continued its downwards movements.
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**Moving Averages**
Moving Averages is a trend-based indicator. It helps traders know when a trend is about to start and also end. It is a combination of two moving average lines that are installed on the chart. One of the moving averages is set with a higher number and the other is set with a lower number.
The two lines give signals when the lower line crosses the higher line. If it crosses the higher line facing up, then it gives a bullish signal, and thus a buy entry is needed. Conversely, if it crosses the lower line facing downwards, then it gives a sell signal and a sell entry is required.
 <center> <sub> Illustration of Market Making Concept | [Tradingview](https://www.tradingview.com/chart/iAELFmGM/) </sub> </center> </center>
The image above is a 4 Hour chart of LUNAUSDT with a 9 & 21 Moving Average installed on it. A cross-over occurred at 14.53 USDT. At this point, the market maker produced a lot of selling pressures to drive the price down.
This attracted the attention of market participants as they saw this was a good sell signal. So they started selling their LUNA coins. Because the market maker had already generated a lot of selling liquidity he starts buying the coins from the sellers. This later had an effect on the price and it moved upwards.
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## Conclusion
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A market maker is someone who behaves differently from others in a market. As their name suggests, they literally make the market. They do this by buying at the Bid price and Selling at the Ask price. They don't place market orders, they place a limit order. Their actions help to provide liquidity to the market and market transactions to move on smoothly.
They achieve their objectives of providing liquidity to the markets by placing limit orders at different price levels. Typically, they place buy limit orders at a price lower than the current best buyers and at the same time create a sell limit order at the current best sellers. The benefits of a market maker are significant in a market, however, investors should be careful when operating in the market.
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