Liquidity During Bullruns: Why Market Makers Are Vital?

Transcript

um today we're going to be talking about why market makers are vital in a uh Bull Run although they're they're definitely vital all the time oh I'll move down one chair then so uh just to go ahead and get started we have uh Patrick here from IMC we have Jonathan from G20 and we have uh Mr Francisco uh from uh key Rock and I'm going to go ahead and let each of them start by introducing themselves quickly please Patrick sure hi everyone uh my name is Patrick I work at IMC trading um IMC trading is a top 10 Market maker across all asset classes basically we

trade options equities bonds um but also crypto so I'm focusing on on the crypto side of things uh we have an office here in zuk around 50 people working full-time on crypto and uh yeah very excited to be here thanks so much thank you much hi everyone I'm Jonathan Mai I'm one of the co-founders in head of trading at G20 uh we're also a cross asset trading firm started with our roots in quantitative FX trading but uh branched out into crypto and other asset classes afterward so pleasure to be here hi everyone name is Franchesco I'm obviously an investment Bank of by trade and not the crypto native spent most of

my career Goldman Sachs uh and since uh the the end of last year I'm a board member a kirok and now recently are helping on the um operational site as a CO at the company wonderful so thank you for introducing yourselves I'd like to start off with a little bit of a contrast between what we spoke about last year on this panel and that was how Market making looked in a bare Market or a market that was emerging from a bare market and now I would say we all agree or most of us agree we're in a bull market so how is Market making different in this market compared to uh what it was in 2022 2023 maybe we'll start with you Patrick sure sure um yeah I think

we're definitely back in a bull market or at least on the way towards that um I think like this question has a lot of angles that you can tackle it from so let me just like point out like two things that I think are important uh one thing is uh transparency transparency has ched a lot um we see it a lot like back in the days last bull market or also in the bare Market there were was not really like the access for the projects that you do Market making for um to get like all the information all the data having kpis in place and I think now these days the projects they are much more sophisticated they either

have someone internal that supports them towards Market making stuff and trading or they have an advis that supports them so it's much more the kpis are clear right now um they also get integrated and written down in the contract which makes the market maker also like binding to basically fulfill them which we think is great because we come from the trfice base we really believe in in transparency um and yeah there are also no misunderstandings towards the project and I think the second point I want to make before I hand over to you guys is um I think it's much more a long-term

partnership these days so if you enter an agreement with a with a project it's not just about Market making as a service it's really about being a long-term partner supporting them from when they start when they fund raise maybe you put in a ticket as well support them there financially and then you grow together with them you advise them until TG happens and also Beyond and then obviously like Market making is also one piece of that you support the treasury with OTC transactions like all sorts of things that basically touch that touch trading in a way excellent thank you yeah I think um thanks that I think one of the things is that everyone

gets much less sleep in a in a in a bull market it's a lot busier there's a a rush to Market from um uh a lot of projects because uh you know in the bare Market people people are thinking about building and product um in the bll market it's go to market for listing and and things like this that's one of the points um in general for the for the other um for the sort of more established projects there's a lot more volume and there's a lot more volatility as well um so that know the market is uh is very busy the whole time there's always a move um and I think it you know there are some markets where everything moves together and then there are other other times when it's more thematic based as as well so yeah it's it's an

interesting time much more interesting in the bull markets than the pairs yeah look you know market makers they provide inventory right so in in a market where volumes are much higher volatility is higher dispersion is higher and there's a higher amount of capital at disposal it's easier marginally easier to hold inventory and do the job they're supposed to be doing number one number two you know obv L markets going cycles and you know compared to the last bull cycle that we had also you know the markets which are above one derivative above and spot have also improved and so it's much easier or at least easier than it was last time to operate as a market maker because of the

reason that I just mentioned and on top of that if you have additional instruments which trade you know with a higher liquidity including Futures and options and so on and so forth across all other exchanges it makes your job easier right and yeah I I think that's the way I would answer the question excellent thank you thank you for that so it sounds like all all of your firms are having a lot more business influx of business now in terms of those businesses are some of you focused more on smaller micro cap tokens and coins versus the larger coins are some of you uh focused on providing Market making for exchanges like you have a relationship with the exchange like who are each of your customer bases like who are your clients maybe we could start

with you Pat sure sorry please go ahead Jonathan sorry sure sure uh yeah so we we do a mixture of of different mandates we trade for ourselves as a a proprietary trading firm but we also have client mandates across the board um some with very liquid tokens in the top 50 and and and and so on and others with newly listed projects as well um which are you know going to market for the first time so we cover the full spectrum we also work with some exchanges too to improve their liquidity um so we help across the board where we can yeah well to KY Rock kyrock has you know not only the classical agency business on the market making side that is split in two on the one side High

liquidity and low liquidity but also for example uh hft high frequency trading and I'm not going to be able to say a lot about that just because it's hftd and you know it's it's a secret source that everybody wants to keep for itself and the last one is derivatives and I say the reason why I say and I talk about derivatives that you know head having an activity on the derivative side facilitates Us in terms of you know taking on more and more business on the low liquidity side of the spectrum so obviously we make markets on bitcoin and eth and you know and the very large cap coins but the space is crowded right so what we do is obviously know take on less liquid tokens why do we do that well because we have another leg in the business which is the derivative leg

which helps us you know financing and supporting the second one that I just mentioned so the split you know I'm not going to uh throw any numbers but you know we're evenly spread across uh HL LL hft and and um derivatives yes I think for for us at IMC the setup is very similar um the companies around for 35 years now and they were constantly developing their alos uh the proprietary alos and yeah we are very strong in high frequency trading um across the board and it's basically we also entered crypto uh back in the days and we saw that yeah we could really compete aggressively with

all the other participants and then we also decided to get into more this client facing business um like you guys are as well we started that roughly like one and a half years ago and are constantly growing this this franchise as well but for now it's still like I would say for us coming back to your question like smaller projects um we can do it we can do it but I think we we prefer like high liquid High liquid uh markets just because uh our alos are tweaked that way to to function very well in in high liquidity environments interesting so it kind of sounds like um KY Rock and G20 are able to kind of look

at some of those smaller token opportunities and then it sounds like IMC is looking at the more highly liquid opportuni so for example um sometimes I'll meet somebody that has a new project they're launching in a new coin or new token and I'll ask them a question like who is your Market maker and um usually that's when they say oh no we want the market we want the exchange to want to list us and we don't want to have to pay a fee or we don't want to have to get a market maker we want them to come to us and tell us that they're going to list us um and and at that point I usually say well you know that's going to be pretty difficult because that's what every token ideally wants right that the exchange comes out to you and says we

want to list you so for these smaller token projects is it do they always have to have a market maker now if they're going to be listed is that like a mandatory requirement maybe we can start with uh with you again Jonathan yeah sure yeah it's it's usually these days the centralized exchange looks for a number of criteria and one of those is that they have a established Market maker um working with the project I think um you know it's important as you list to have liquidity and for the exchanges customers that the retail customers in particular that they have uh good execution and good fills for the for the trades that that they do so I think these days it's it's quite common to have a market maker in fact almost a requirement uh sometimes projects on

that point they you know they're so focused on their product that that the understanding of liquidity you know may not be there and and they think that maybe they can launch on a on a DEX for example as a as a as a starting point which um uh isn't really recommended um as a as a as a goto Market strategy interesting how much of your activity is is on dexes right now versus on Sexes well the great majority for us is still Sexes centralized exchanges um but we're expanding obviously and making you know try to be more active on the lp side on deis and maybe to come back to the question you asked before

um coming from trade fight it's difficult for me to have one token or one stock for that matter starting to be admitted to trading on an exchange it can be NASDAQ or do B it doesn't really matter without a market making and and and thinking or expecting that the price price Discovery mechanism will be functioning because it doesn't at least at the beginning so you know at the very beginning I would have said you know having a market maker that makes markets and takes care of the token or the security on the other side is Paramount obviously if you look for example the percentage of volume generated and taken care of by a market maker on day one versus what's going to happen in 12 months time obviously if that be at the

beginning there may be you know n 90 95% of the volume but if you progress and the market becomes more and more diverse and what I mean by that you have uh additional segments of clientele on both sides of the market so not only retail but also institutional clients not only retail institutional clients but also hedge funds so on and so forth so the more diverse the bid and the offer side are the less important is the role of the market maker but that happens only along the way um yeah interesting wonderful so I mean I thought the goal of most market makers was to be Market neutral but last night I was talking to Mark from IMC who was on the panel last year and he said that that's not always the case that sometimes they are

directional and they are interested in the long-term like appreciation of the of the underlying assets that they Market make for so how do you decide which projects you're directional on versus which projects you try to hedge and yeah so I mean yeah it's a good point I mean when when you break it down to Pure liquidity providing and Market making we always try to be delta neutral so means like if if someone buys and we sell a token then we obviously reverse the trade somewhere else or we use derivatives to to be flat and have no exposure directional um in that sense yes in that in that case we are definitely definitely delta

neutral but we also have a prop side right so a prop prop side is basically yeah we trade with our funds but also there most of the time we are delta neutral obviously it can be from time to time that you're longer position or shorter position I mean especially in low liquid markets um if it takes a little bit longer to C your position or if there is no like instrument of available to immediate immediately hatch yourself then you face the risk to be long right because normally the hatching happens within milliseconds um because you obviously want to hedge before the price moves basically you want to lock in lock in the Hedge um so yeah it can happen from time to time that you are

but we obviously our goal is to be as delta neutral as possible okay for most of the time yeah I think to to add to that as well so from a we have maybe more of a a client business where we have mandates with clients sometimes showing an order book means that in a bullish Market we know we that we're going to see um uh buying flow at some point so to hedge against those moves we have to maintain a slight long bias and across our our books to um you know deal with those flows I mean sometimes you can see in crypto in the bull market 20% moves quite easily in in a day right or and and so that's not unusual and they're if you're mandated to show a 2% wide book it's quite easy to get um uh

you know run over in that sense so U maintaining long positions is quite important in the bull market I think you know my answer would be it depends a lot on the origin or on how the company started you have companies that started um as a propriety trading firm and they leave that through their whole existence and then they expand into the franchise business I we're doing such a good job as a proprietor shop and then we can offer that service in terms of execution on an agency basis also to our clients or vice versa there are companies that you know start by offering the service of making markets and they're delta neutral Market neutral and so on and so forth and they develop the talent as well therefore for markets

and then expand into the prop shop I think as long as you have your conflict of interest under control at the firm level it's good to have both right um you know maybe I'll mention Goldman Goldman started as a franchise business right issuing issue in equity and debt but then as markets developed and they realized the firm they realized that they had a a strong grasp on risk they could control risk they realized they could run more risk than anybody else in the market and that's why they all of a sudden you know they skewed towards more the prop trading angle of the business so it really depends on how you start well you kind of mentioned that there there could be a conflict of interest at times though between these because if you have a prop desk that has

a position that's long or something like that and then you you you you tell your colleague that's working at the desk next door that's making the markets how do you stop uh or how do you prevent these types of situations from occurring and and when you have both in a company yeah well you know that probably has been trade by as well right that's why we have Chinese walls obviously right ECM and DCM sit on one side of the business the security and capital markets division on the other side just because you want to avoid having the two sides talking to each other and mingling right uh how do you do it well you build the wall right you build the wall inside the company and make sure that you know if anybody needs to cross that wall that everybody knows including legal and

compliance and so on and so forth now that's trade F and the regulation imposes on trade F certain rules in crypto well where's the Border where's the wall you know there's no wall so it's it's a matter of you know the compan is maturing and being mature enough to know that they need to manage the conflict of interest uh that they have you know implicitly obviously because otherwise you mix flows and you're you know either doing a good job for the firm nor going doing a good job for the for the firm definitely yeah yeah I think we we see it as well on at IMC I mean we are 1500 people quite a big shop with nine offices around the world and we have we have licenses to trade on you know like the CME or the

New York Stock Exchange Etc and for us obviously the compliance oversight is massive right because if we do something wrong in the crypto side then obviously the rest of the business is affected too and we obviously don't want to risk our reputation there so as as Franchesco said it's really really important to to differentiate between the two the two businesses and have like these internal risk me mechanisms to to kind of avoid this interesting I think from a also from a from a client side business as well it it's really important to maintain good relationships with your clients and to for them to trust you completely in in the market for a lot of these firms they are coming to a market

maker because they they need support on that side they don't have their internal teams dealing with with markets right so um it's very much in our interest and I'm sure for all of us we would um be looking after our clients so to avoid conflicts of interest like that that makes sense that makes sense so um right now I'm going to open it up to the audience for just a minute is there anyone here that's currently looking for a market maker so you have a token project you're looking for a market maker do you have a question for any of these gentlemen in terms of looking or anyone in general have any questions for Market making ask the tough questions now they really

opportunity okay well yes share the Fe excellent yeah so maybe I don't know if you can but if a coin came to you with a with a mandate and they uh wanted you to work with them what what what would that involve how would they how would they pay you or so they give you a loan of coins and then over time you have like option on the price of those coins or I don't know how it works I think there there are different I can make a start in you please add as well um there are different types of femal models uh for for clients um

there's the straight up retainer type style where there's a fixed fee every month and uh a loan of tokens inventory to be able to manage um there's the loan and option style model as well where there's no fee as such but there's a uh an option or a strip of options on the underlying you know the token as well um and then there are volatility there are sort of um volume based uh rebate so the more volume you do the the more you're incentivized so I think each client I think one one thing that's quite important in crypto is that there are so many projects and each each um project has um a niche or you know a particular requirement so we don't tend to enforce a model on anyone we'd say

this we know there's a number of Frameworks you can choose something that suits you and we know that the sort of um sometimes clients need a a bit of time to get familiar or to become comfortable with with each approach and so you know we're very flexible generally with how those things kind of work yeah for us it's very similar so we have all the different models I think it really really comes down to the project and we try to accommodate as much as we can um and then it's as I said it's normally these days it's not just like one service that you provide it's normally like multiple services and you kind of try to accommodate as much as you can and like normally there are not

like implicit fees that you have to pay I mean like on an exchange it's clear you pay such such amount for maker such amount for taker uh with us it's like yeah if you have the retainer model then of course there's like a fixed fee you pay that and good it good good you're good to go uh on the other side you normally how you incentivize a market maker is to give him some sort of upside on certain things that if the project does well the Mark May kind of gets rewarded at the same time right so that I think it's important that all these incentives are kind of aligned um and that's therefore I think the these kind of models are are the best to to to

foster a strong strong partnership yeah well my answer is you know the one that a lawyer would give it depends and it depends you know you know from Project to project you know exactly you know what the characteristics of the project are but as as he said right the most important thing is actually that whatever model it's used that the incentives of the market maker and the token provider are aligned that's the most important thing you know project would even want to pay more than what competive show as long as the counterpart and doing the business with you know has the same interest as the token itself because there's nothing worse than you know um getting a market maker

making markets for your own token as as cheaply as possible and then realizing once this thing hits the hits the uh the market that they're working against you as opposed to you know in favor of you yeah we've definitely seen a lot of coins that um start trading on the secondary markets for the first time and it's a a rude awakening for all the investors um but yeah definitely uh very interesting so in terms of like being in the market um also again last night I was talking to Mark at the VIP dinner and Mark said that it's sometimes difficult for him to show the clients the success of the of imc's own

Market making because it's hard to decompose the order book and see how much the liquidity increased because of uh your actions versus another Market Maker's actions versus a difference in demand from from the investors side so is there a way you can actually show your client sence how you have improved liquidity um yeah I mean like you can have a look at the data and you normally see like how much of the market you were you were basically trading and this gives like kind of a good kind of a good impression on how you were doing also you look at spreads you look at the different uh depths within the order book like how much you you were there up

time obviously and I think like these are exact the kpis that um the token token teams these days want to see right and you report that back and there are also like some third party tools where they can basically monitor that um and see like how the market making really is doing and um yeah I think these are the metrics that they can see obviously like yeah the rest like all the prop trading you obviously don't give the information out there because it's yeah it's your your your source and you don't want to you know like give this information out so but yeah on all these service deals like I mean there are kpis these days

you fulfill them and that's basically how you can see how it developed I would say I think regularly looking at the progress of those kpis as well of of how much the volume percentage is of the total volume I think we generally have a a rule of thumb of somewhere between 15 to 30% of the volume is a good good um um Target to aim for um I think from a market making point of view you don't want to be too little because then you're not done your job we don't want to be too much either because then there's not really a very organic um Market um so I think volume capture is an important one and then I think venues as well because um you know um for some

bigger projects they might be listed on 12 13 14 different uh venues and so uh seeing the the sort of capture across those different places and trying to um make sure there's good liquidity on all those I think that's important I'm kind of surprised you know that issuers you know don't appreciate the value of market makers maybe what market makers should do is just disappear for a day and see what happens to the market you know the central midor the book depth see what happens with that right and then no you know King aside there are metrics you can look at obviously and see for example if you have a certain amount of volume on any given day how much of that volume has the has been matched between retail and Retail and how much has been matched between retail and Market maker or Market maker and Retail and then you see

the difference but otherwise I know some of you might remember NASDAQ when they were still trading on the floor and they had these you know cubicles back in the days which were the Specialists right the market makers just have the guy disappear for a day and see what happens to the market it's not going to look good so it sounds like you're saying like 15 to 30% of an order book at any given time for a token that you're working with would be done by a market maker 15 30% of the volume of 15 30% of the volume I'd say the order book is primarily market makers generally speaking retail would be a taker on that order book and uh it'll be Market maker the market maker or market makers which are the um make up the AIT book exactly

yeah okay good good thank you for explaining that so yesterday I was talking to somebody from biit and he said that he thought the order book most mostly was 90% market makers and 10% you know other investors that just have their limit orders sitting in their account waiting to get filled he said on the actual uh side of of what trades actually get filled and and the executed trades he said he thought it was about 5050 so 50% market makers 50% um traders that are from the market so is that probably what you guys see is is that different for like let's say a smaller coin or not okay I don't want to say a smaller coin but like a yeah a smaller coin versus a large coin like is that

composition different or is it pretty much 50% of every order that's been executed is it that's Market making or well my take I don't know the numbers but my take is large cap coins the market making market market makers market share is probably relatively limited if not zero if I look at Bitcoin in e no necessity in having a market maker on bitcoin one why well because the market structure on that very token has been you know developing over the last 13 14 years and the same applies for those you know other large cap tokens but you know for low liquidity small caps with no Market maker there's no

Market well there's only somebody offering and nobody buying so I don't know if you can Define that as a market yeah I'd agree with that I think the um I think the smaller tokens you definitely need a market maker um especially across like a number of different venues um I'd say that that for the like maybe the the the names like IMC You' also be very active in Bitcoin e there right yeah exactly so like the the high liquidity tokens I mean like there you go in with prop trading and you obviously also don't want to be like too big of a market share because if you trade high frequency you always want to have the good trades you want to be the first to arrive at the new levels right so you

don't want to be second you don't want to be third because that would mean you Pro potentially get a bad trade so if you are 50% of an of an order book then for sure you're going to have bad traes in there that are not really profitable but um yeah also like coming back on the on the flow retail versus market makers I think you get as a market maker when you're in the market you get a lot of data from that and you see very fast that if if the market book if the order book is healthy or not if you have toxic flow from like other market makers or if you really trade against retail right and obviously every every Market maker wants a healthy order book with a lot of

retail flow um to trade against and not to trade against other market makers is there any like sign that when you realize that you're trading against other market makers and if there's a lot of toxic flow and then you're like we need to get out of here or well you see it in the p&l ultim right um You obviously have risk mechanism in place to detect that back early on so you don't really run into into a negative scenario but um yeah you see it pretty fast I think we also with if it's another Market maker you typically expect them to be trading um like top of the book as in in smaller size top of the book for limited slippage um whereas if you're um with aggressive retail FL

like we've seen on certain exchanges recently you'd expect them to sweep through the books um more regularly interesting which actually may be an interesting point about exchanges actually some of the some of the exchanges recently have uh in this bull market have really um The Exchange mix has really changed I think from the last bull market um I think we were talking about it earlier a bit about um how exchanges like bit vvo for example have have uh have come up this time which are very heavily retail focused mhm um and then there are other exchanges like gate which have come up um the last six months or so um I'm behaving very differently here before as well interesting so um so Francisco you joked

a little bit earlier about you know let's just see what happens if the market makers don't show up to work one day is there ever a time when Market maker you you pull out of the market like for example if hedging becomes prohib prohibitively expensive or you can't find a way to hedge do you ever you you just leave the market on your own accord well it depends on the agreement you have with the with the issue right if you have a certain certain commitment or you have delivered a certain commitment say I don't know 95% up time a certain spread a certain size inside that spread and then you know you widen that out if it's a commitment it's commitment right you get paid for that so you should be you should be making markets the way the issue expects you to make in markets

because you get rewarded for that right now it makes a difference you know if you get re rewarded by getting a check at the end of the month or if you get rewarded and we mentioned that before by being long call options on that very token and so on and so forth it depends a lot on the structure but um well look you know not every trade that a market maker enters is going to be a good trade sometime you lose sometimes you make money but I guess you know the more the more the market structure develops and improves the more instruments are at disposal at the market at disposal of the market maker to hedge those risks and what I mean by that is you know across more exchanges with more volume using derivatives symmetric and non-symmetric derivatives the less the chances you're

going to be losing money on certain trades but look if if you were making money at all times we wouldn't been sitting here I mean at least I wouldn't be sitting here I I think sometimes uh with with let's say there's an exchange risk for example there there's some news on Twitter that an exchange is going bankrupt I think in those cases even uh you'd probably pull out the market um and and just wait and see um or withdraw assets and wait and see especially if it's a client mandate which um uh where it's their assets that you're you're managing okay so yeah yeah I mean yeah very similar answer I mean like if you pull out um because like counterparty Risk is a thing then obviously you

discuss first with the with the Mandate you have like is it okay for you to pull out because of safety reasons and then if it's okay you OB L Do It um but yeah if you have kpis you have them in the contract you have to fulfill them right on the prop side I mean you can do whatever you want in the end so um for the um Market making side are you holding your own private keys so you're in charge of figuring out custody and you you can't give that away to anyone else because you have to have access to your funds all the time right either on a hot wallet or in a in a in a way that you can get it on the hot wallet very quickly so does each market maker basically do their own custody well I mean it it comes down

right if we talking um centralized Exchange Market making then normally you have a wallet that exchange um that you trade out of um there are like other other Solutions right now where you have like this off exchange model that you can hold the Assets in a in a separate C custodian and then basically replicate them on the exchange and trade like this um def is then obviously a completely different story yeah I think in general we try to take an approach of keeping the minimum on the exchange as possible to to do the service that we've been asked to so we'll use third party software where possible or providers um fire blocks copper and the such like um

to keep balances off exchange when we can and then there are certain cases like defi like Patrick just mentioned where we will have to manage our own wallets um especially when there are it's not a sort of a un type situation if it's a um a um a DEX a particular change Dex then we would have to manage our own uh yeah it really depends again but you know when our assets are on the exchange then we don't have to control we'd like to have right obviously for obvious reasons just because you know generally it's the exchange control in the assets we saw that with FTX and they could potentially do whatever they want with it that's CI right CI set up the wrong way as it's you know set up right

now if you look at defi is a different story again and but if you look at you know back to CI uh the market is also evolving there right if you look for example at the cust providers maybe some of those are in the room fire blocks copper and so on and so forth what they try to do is action you try to well number one try to make some more money than they do with custody and they try to integrate vertically right up or down so they're trying to develop you know in addition to the customly layer also a clearing or settlement layer so that you know that risk that you have as a market maker when your assets are on the exchange and controlled by exchange is mitigated because you can keep your asset a bigco copper fire blocks if you want and then basically have those

assets leave only when you have traded something on any of those exchange right so but the answer is we'd rather have control on our assets but when they are exchanges you know they're just out of our control I'm exaggerating now but I'm saying we don't control the private key we can withdraw ask for withdrawal but you know wonderful well I think that we provided tons of information uh especially you three during this panel and I'd like to say thank you to everyone for joining us and if you have any questions for these three market makers please do find us uh after this discussion and and I'm sure that they'd be happy to to help thank you let's give a big round of applause thank you