Original Title: "The Relationship Between Market Makers and Altcoin Crashes on the Night of Disaster"
Original Author: Master Brother from Australia, Crypto KOL
Today, I saw many KOLs' tweets where people are still asking why many altcoins could plummet to near-zero levels on the night of the crash. I had similar doubts before, until I later understood how market makers (MM) operate in centralized exchanges (CEX).
This post by @yq_acc specifically discusses the behavior and logic of market makers on the night of the crash, and it's definitely worth reading for those who are patient enough to understand the operational mechanisms.
But today, I will briefly explain some common misunderstandings and questions about market makers based on the situation on October 11. If my explanation is incorrect, I welcome market maker friends to critique it. The article is long and dense, with 4000 words typed out by hand, and it takes about 5 minutes to read. Creating this is not easy, so I appreciate likes, saves, and shares.
Who Provides Liquidity in CEX?
Centralized exchanges (CEX) essentially provide a platform (casino), where the active roles include project parties (various gambling tables), traders and users (gamblers), as well as various market makers (MM).
Of course, liquidity is not only provided by MMs; project parties sometimes provide initial liquidity on CEX, especially when launching new coins. Retail investors' limit buy and sell orders also contribute to "market depth," but compared to professional market makers, retail liquidity is more "fragile."
Why Is This Role Necessary?
The significance of MMs is to ensure that every gambling table can take orders at any time, so that when gamblers want to bet, there are counterparties available. Simply put, they act like lubricants; without them, the market would be very "dry." Without market makers, buyers and sellers would need to match directly, which could lead to significant price discrepancies, and small transactions could cause large fluctuations.
If you try placing orders for major coins and particularly obscure small coins in a CEX, you can feel that large funds can enter and exit major coins with almost no volatility, while a few tens of thousands of dollars can cause a 20% drop in small coins.
Why Don't CEXs Do MM Themselves?
The simplest reason is that it requires a massive amount of capital, and secondly, due to compliance.
As the number of tokens increases, each token requires liquidity, which accumulates to a very large number. From the perspective of CEX, the most cost-effective thing is to set up the casino platform and let various people perform, rather than doing everything themselves.
Therefore, in strictly regulated areas (like the U.S.), exchanges like Coinbase and Kraken must strictly differentiate between matching and market-making operations. Coinbase even established an independent market-making subsidiary (Coinbase Prime/MM).
If a CEX acts as an MM, it easily becomes both the referee and the player: it controls user data (order books, stop-loss points, position directions) while also trading in its own accounts, leading to conflicts of interest. This is one of the reasons why some competitors have sparked controversy over CEXs betting against users.
How Do MMs Make Money?
There are mainly two types of market makers: passive market makers and active market makers, and their ways of making money are quite different. Well-known passive market makers include Wintermute, GSR, Amber, Jump, etc. Active market makers tend to be more low-key, but there are quite a few, and many meme coins come from their hands.
Passive MMs primarily earn through incentives provided by project parties (maintaining market depth 24 hours a day). A common structure is a fixed fee + floating incentives, such as "monthly fee of $50K + 0.05% bonus on trading volume." They also engage in arbitrage, often being active on multiple CEXs and DEXs, and when prices are out of sync, they immediately arbitrage.
Active MMs are different; they are often deeply tied to project parties, helping them control the majority of liquidity, and then use leverage to attract the market to chase high prices and sell off, or engage in more flexible market behaviors to make money. Many retail investors' nightmares, such as $TRB, $MYX, and the recent $COAI, are the works of active MMs.
How Many MMs Does Each Project Sign?
Many projects may initially sign contracts with about three MMs, and after a period of evaluation, comparison, and elimination, one or two remain as the main MMs to maintain long-term liquidity support.
Returning to the main topic, why did many altcoins suddenly plummet to unbelievable levels on October 11? Is it related to the behavior of market makers?
My answer is: yes, and significantly.
First, as far as I know, there are about 50-70 active MMs on Binance, supporting the vast majority of token liquidity thickness when the market is stable. However, with the rapid increase in the number of altcoins and the weakening of liquidity, many old and small altcoins' liquidity is concentrated only near the order book (buy 10, sell 10?), like the shell of an egg.
In non-extreme situations, MMs can steadily earn a bit of spread through continuous buying and selling, at which point their interests align with those of the project parties, and everything operates smoothly.
On October 11, when the USDE depegged, causing wBETH and BnSOL to crash and create a cycle of plummeting prices, a major problem arose in the market: the interests of MMs conflicted greatly with maintaining the depth for project parties. To put it simply, whoever continues to maintain buy order depth would be crushed.
At that moment, what would you do?
Let's look at the timeline:
4:40 AM: Real-time tracking data shows that catastrophic liquidity withdrawal begins. The market depth for major coins starts to plummet from $1.2M.
5:00 AM: A critical turning point, the situation deteriorates sharply, the bid-ask spread widens, and order book depth decreases. This is when a large number of MMs shift from defensive positions to complete withdrawal.
5:20 AM: The peak of chaos, at that time, almost no MMs in the market continued to provide services, especially for small coins that had only signed with one or two MMs. Once the egg shell was broken, the orders below were in a vacuum, leading to a 98% drop (retail investors had long been unable to place orders at such low levels).
5:35 AM: Market makers cautiously begin to return, gradually reaching 80%-90% of the pre-disaster levels, but the disaster has already occurred.
From this chart, we can see how quickly liquidity disappeared:
So, it can be inferred that the real situation at that time was: almost all the MMs still awake had begun to sense the storm after 4:40, and the smart ones withdrew all their orders from the battlefield within the next 20 minutes.
More MMs formed a stampede to escape in the following 20 minutes, and in panic, almost no one would be willing to adhere to the MM agreements signed with project parties -- at that time, the losses from not leaving far outweighed the small incentives from project parties.
At that moment, all rational traders were in self-preservation mode -- not seeking profit, just trying to survive.
In fact, MMs who did not wake up in time to notice the problem suffered heavy losses during this wave, with some waking up to find they had lost hundreds of millions of dollars. Future 24/7 cross-time zone configurations may become standard for MM teams.
Why was there such a large price difference between Binance and other CEXs, and no one arbitraged?
Don't forget, the liquidity of mainstream CEXs is actually provided by the same group of market makers. Wintermute, GSR, Amber, Auros, and Cumberland are simultaneously making markets on Binance, OKX, Bybit, Coinbase, and other platforms. When one platform faces severe risk (for example, a surge in Binance futures liquidations), market makers will uniformly withdraw all orders from all exchanges to avoid being caught in liquidation. Therefore, during the most chaotic moments, when the price differences between CEXs were the largest, the entire market entered a liquidity shock state, with Binance being the main battleground for recursive liquidations, and no one arbitraged to balance the coin prices, leading to the lowest prices.
So, the conclusion of my long article is:
The current market maker system has its limitations. When the market is normal, everything operates like a precision machine, but when a black swan event occurs, it only leads to a scramble for who can escape first, similar to retail panic.
To simply say that Binance maliciously pulled the plug to harvest profits shows a lack of understanding of the MM system. Binance is a larger target, but Binance does not equal MM; these are two different matters. Of course, the structural risk that triggered the black swan was the USDe circular loan, and Binance has a responsibility in prevention.
However, this crash indeed exposed many issues, including the seemingly robust market maker MM system that has been operating for many years. If CEXs want to advance further in the future, how to address this loose cooperation model where "when the tree falls, the monkeys scatter" is also very important.
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