Introduction to CEX Liquidity

The Role of Market Makers in Trading Newly Listed Assets on CEX

For newly listed assets that are relatively unknown, the order book often presents limited or no orders, posing challenges in terms of attractiveness and feasibility for potential buyers and sellers. For example, a significant price spread, such as a 30% difference between buying and selling prices, can result in immediate value loss for the buyer.

Challenges in Trading Low-Liquidity Assets

The scarcity of traders making offers in the order book can hinder the ability to trade large quantities of an asset, affecting its tradability. The asset’s price is typically set through a consensus between limit buyers and sellers on a specific price point.

Market Makers: Facilitating Trade in Illiquid Markets

To address the limited order volume in an order book and enhance an asset's tradability, market makers play a crucial role. They contribute by populating the order book with a substantial number of buy and sell offers at acceptable prices, ensuring that participants can readily execute transactions. Initially, market makers might constitute the majority of orders in the order book.

Evolution of Market Liquidity

As an asset matures, increased participation from other market players who place limit buy and sell orders can lead to the development of organic liquidity. Without such orders, an asset remains largely untradeable.

Complexities in Providing Market Liquidity

Providing liquidity in a market, especially in the context of differentiating between decentralized (DEX) and centralized exchanges (CEX), involves complexities that extend beyond merely placing orders. Effective market making demands the management of liquidity quality, inventory control, volatility, and the balancing of profit and loss. The following section delves deeper into the distinct liquidity management approaches for DEXs and CEXs.