Key Takeaways
- • Tiger Research argues that the negative reputation of crypto market makers stems from price manipulation firms that adopted the label, since no clear qualification requirements existed to prevent the name from being used indiscriminately.
- • Legitimate market making lowers investor trading costs by narrowing bid-ask spreads, reducing slippage on large orders, and providing a counterparty at all times, with the spread effectively serving as a fee for immediate execution.
- • Crypto market makers perform the same function as traditional-finance counterparts, but lack a formal contractual framework with CEXs, and issuer contracts with token projects are generally undisclosed.
- • The Digital Asset Basic Act, as proposed, permits CEX-commissioned market making but recognizes issuer-commissioned contracts only for the first six months after listing, which Tiger Research says leaves most problematic issuer contracts outside the framework.
Summary
Tiger Research examines why crypto market makers are viewed with suspicion and what distinguishes legitimate market making from manipulation. According to the report, distrust originated with firms that operated under the market maker label while offering "manipulation as a service." The report cites a US FBI case against such firms and a Korean case in which a group inflated trading volume under the pretext of providing liquidity and received prison sentences. Tiger Research characterizes these operators as illegal actors that offloaded token supply for a fee rather than genuine market makers.
The report defines a market maker as a participant that supplies liquidity by quoting buy and sell prices simultaneously. It notes that in Korea the term "liquidity provider (LP)" is also widely used. Under a broad definition, any resting maker order supplies liquidity, and high-frequency trading firms such as Jump Trading fall into this category. Tiger Research argues that the value of a market maker lies in addressing hidden trading costs: whether orders execute immediately at the desired price, whether large trades move prices, and whether prices diverge across CEXs. Using a hypothetical example, the report shows that a spread of KRW 1,010 to KRW 990 implies a 2% loss on a round-trip trade, and that this loss grows with order size as orders walk up the book.
For token issuers, the report says market makers provide consistent trading after listing and allow issuers to avoid suspicion of directly intervening in their own token's price. Under the typical arrangement, the issuer lends tokens and an independent market maker manages quotes. Tiger Research states that legitimate contracts include provisions prohibiting price manipulation.
The report contends that crypto market making is structurally similar to traditional finance but differs in regulation. In traditional markets, approved firms sign formal exchange contracts, receive fee discounts in return for quoting obligations, and the exchange publicly discloses its market makers. Crypto lacks an equivalent framework for CEX contracts or issuer contracts. Tiger Research notes that the Korean market prohibits CEXs from acting as market makers but still has no standards for legitimate market making. It also states that trading with one's own capital is already legal and that the regulatory gap concerns formal contracts and licensing, citing the EU's MiCA as not requiring a license for own-capital market making on a CEX.
The report identifies issuer contracts that measure performance by trading volume as the main area of concern, citing industry participants who say these contracts vary widely in terms and that their structures carry a high risk of wash trading and fictitious trades. Tiger Research highlights the proposed Digital Asset Basic Act as the first opportunity to codify these rules, noting that its current six-month limit on issuer contracts leaves most of the problematic arrangements unaddressed. The report also notes that crypto markets trade around the clock across fragmented venues without the exchange and clearing protections found in equities, which adds risk for market makers.
The report defines a market maker as a participant that supplies liquidity by quoting buy and sell prices simultaneously. It notes that in Korea the term "liquidity provider (LP)" is also widely used. Under a broad definition, any resting maker order supplies liquidity, and high-frequency trading firms such as Jump Trading fall into this category. Tiger Research argues that the value of a market maker lies in addressing hidden trading costs: whether orders execute immediately at the desired price, whether large trades move prices, and whether prices diverge across CEXs. Using a hypothetical example, the report shows that a spread of KRW 1,010 to KRW 990 implies a 2% loss on a round-trip trade, and that this loss grows with order size as orders walk up the book.
For token issuers, the report says market makers provide consistent trading after listing and allow issuers to avoid suspicion of directly intervening in their own token's price. Under the typical arrangement, the issuer lends tokens and an independent market maker manages quotes. Tiger Research states that legitimate contracts include provisions prohibiting price manipulation.
The report contends that crypto market making is structurally similar to traditional finance but differs in regulation. In traditional markets, approved firms sign formal exchange contracts, receive fee discounts in return for quoting obligations, and the exchange publicly discloses its market makers. Crypto lacks an equivalent framework for CEX contracts or issuer contracts. Tiger Research notes that the Korean market prohibits CEXs from acting as market makers but still has no standards for legitimate market making. It also states that trading with one's own capital is already legal and that the regulatory gap concerns formal contracts and licensing, citing the EU's MiCA as not requiring a license for own-capital market making on a CEX.
The report identifies issuer contracts that measure performance by trading volume as the main area of concern, citing industry participants who say these contracts vary widely in terms and that their structures carry a high risk of wash trading and fictitious trades. Tiger Research highlights the proposed Digital Asset Basic Act as the first opportunity to codify these rules, noting that its current six-month limit on issuer contracts leaves most of the problematic arrangements unaddressed. The report also notes that crypto markets trade around the clock across fragmented venues without the exchange and clearing protections found in equities, which adds risk for market makers.
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