A Brief Introduction Liquidity Provider

Posted By Rohan Dodeja | 31-Jul-2018

What is Liquidity Provider

 

A Liquidity Provider or market maker is an independent entity which regulates and supply the assets in the market to maintain the ethics and faith in the market. Like in case of cryptocurrency Liquidity provider supplies the crypto assets in market to maintain the regular flow in market which makes the exchanges running.

 

Need Of Liquidity Provider

 

When a new exchange introduce itself in the market then at that time there will be no order book of it’s own so to come over from this situation one has two options :-

 

  1. Either exchange dynamically create an order at runtime by its own.

  2. Or take order from the outside to make match of that order.

 

In first situation when exchange is dynamically creating order at runtime then at that time exchange is losing it’s crypto assets and when the situation comes when entertaining all buy orders a huge sell orders comes when exchange can’t able to fulfill that and also losing crypto assets is not good for exchange as at some time exchange has to buy new crypto assets to serve sell orders.

 

Whereas in second option when exchange is serving its orders by taking it from external then at that time exchange is also serving it’s orders and also making profit by taking commission from that trade. And if it is used in mixed mode then it also gives profit as some sell orders can be performed at it’s own.

 

How It works

 

Now taking the example of Binanace exchange following has to be followed :-

 

  1. Create an account in the Binance.

 

  1. Create auth and secret key by which you can access their data like order book and also execute order API’S.

 

  1. Now add balance in the wallets created for your prefered markets.

 

 

bitcoin wallet

 


 

 

  1. Like if there is a market of BCH / XRP , BCH / ETH or from BCH to any other then you have to buy or have to transfer BCH to Binance for order execution of cryptos, let’s say suppose you bought initially 10 - 15 bitcoin cash as after establishing market exchange is enough capable of its own executions.

Cases of Liquidity Provider 

> Buy / Bid

> Sell / Ask

 

Case 1 (BUY order)

When an exchange has only buy orders and no orders match in sell orders then exchange has to trade of with the liquidity provider to match it’s user’s buy order now let’s say user commit an order of buying 10,000 XRP in exchange of some 0.50 BCH ( including your exchange commission ) and now exchange will try to match with sell order of Bianance for 10,000 XRP at lower rate like of at or below 0.49 whatever it matches with lower amount let say suppose it has an order of 0.3 BCH for 10000 XRP then we will execute that order and the difference amount will be our spread i.e. profit.

 

buy order

 

Now from above example it is understood what will be the flow of BUY orders with Binance liquidity provider.

 

Case 2 (SELL order)

 

Now exchange has only Sell orders and no matching orders in Buy then exchange has to again trade of with liquidity provider for matching its sell order with its buy order, let’s say user commit an order of selling his 10,000 XRP at 0.6 BCH, our order matching engine will try to execute this trade at higher than 0.6 BCH as for us we just selling at Binance platform so to maximize profit we try to sell at slightly higher rate like 0.64 BCH and again difference will be profit to exchange.Lets understand with the example :-

 

sell order

 

NOTE: When we are placing the orders at Binance or any other liquidity provider then at that time all external transaction (BUY / SELL) to them will be treated as there own transactions like we are just a User to them so all Orders which are executed at their end will be held at their end as our User wallets in respective Crypto wallets like if we buying XRP in exchange of BCH then we should have first of all that much BCH in that account and we will get XRP at there end and vice versa is also true.

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