“Market makers” shouldn’t get to mess around with shares they don’t have. This whole idea of privileged traders, T+X settlement, etc is just crazy to someone who’s been used to trading crypto.
> This whole idea of privileged traders, T+X settlement, etc is just crazy to someone who’s been used to trading crypto
We have fast settlement for Treasuries. They’re T + 1 and heading towards real-time settlement.
For equities, however, there really aren’t many downsides to T + 2. At the same time, there are many advantages. On the balance, most people who have an idea about clearing are fine with T + 2, though it’s heading towards #
T + 1.
As for market makers, we have similar evidence for market made markets being more stable in crisis than order book markets. Cryptos don’t need this. They have never marketed themselves as being stable, and don’t do anything that requires price stability.
What is the distinction here between what you call "order book" markets and "market made markets".
Surely anything traded on a central limit order book requires outstanding limit orders to provide liquidity and therefore all order book markets are "market made"?
Or are you working with some specific technical definitions here?
> Surely anything traded on a central limit order book requires outstanding limit orders to provide liquidity and therefore all order book markets are "market made"?
No. Some markets, e.g. the NYSE, have specialists [1]. They support the market even when there is nobody else on one side of the order book. When companies list on the NYSE, they are explicitly asking for a group of market makers to be able to naked short their shares as a stabiliser. Many longer-term investors, similarly, explicitly express preference for these protections.
Other markets, like dark pools, are completely counterparty to counterparty. Still others operate around dealers (who are similar to but distinct from specialists).
There is a lot of variation in and competition around market structure.
Ah okay thanks. I always just considered professional market makers (as described there) as just another kind of participant or counter-party who just has a particular strategy and maybe takes advantage of volume rebates or similar (but basically transparent) incentives to act as a liquidity provider.
But I see that you're making a comparison about bitcoin markets where that kind of structure is mostly not there.
That reminds me. For anyone interested, there's an interview with a HFT market-making guy here who set up the LXDX exchange for crypto derivatives and who talks a bit about the differences in market microstructure: https://www.youtube.com/watch?v=xkhLZXLb8mU
The same concept exists in crypto. It’s called flash loans. Ethereum smart contracts can absolutely sell tokens that they don’t own, as long as they buy them back before the end of the transaction. Like traditional market making, this is used to arb price differences in the Defi ecosystem and improve liquidity.
