Market making and STP are different ways in which orders are processed in the financial markets. It dictates how brokerages operate and their business model. Similarly, in the case of crypto exchanges, orders need to be processed. Prior to 2020, exchanges are limited to market making models to create orders for their users due to the absence of an STP option.
However, with the maturing tech landscape in crypto, STP is now made possible, enabling exchanges to pass organic trade orders to an upstream liquidity pool. The following examines how each model works and the role it plays for crypto exchanges.
What is Market Making?
Market making is an activity that creates a healthy and active market for both buyers and sellers by submitting both bid and ask limit orders on a crypto exchange. Market makers place multiple limit orders and wait for traders to match their market orders. By citing rates both for buying and selling an asset, market makers “make a market.” The market maker thus functions as both a buyer and seller where there would normally be no other buyer or seller, thus providing liquidity.
What is Straight-Through Processing? (STP)
In general, the Straight-Through Processing (STP) model is a fully automated dealing system done purely through electronic transfers with no manual intervention involved. They are referred to as an NDD or No Dealing Desk model because the orders do not run through a dealing desk. In the context of forex, this mechanism is sometimes referred to as the brokerage model of A-Book forex. The STP system operates by electronically processing each transaction and directly and anonymously entering it into a community of participants in the Interbank markets, i.e., liquidity providers, for execution at competitive prices.
Market Making in Crypto Exchanges
In the crypto exchange, the first way of handling orders is by organic order book, where the matching engine matches buyers and sellers within the exchange. But to boost liquidity, market making is the predominant way exchanges use to process orders. The market maker’s objective is to provide liquidity, tighten the spread between trading pairs, and promote the volume of the order book. The use of a market maker will facilitate price discovery and the successful fulfilment of orders. Healthy order books, in turn, increase the level of confidence of investors in the exchange, building confidence that is crucial in such a volatile space. However, the main problem faced by market makers comes from a liquidity crunch, where the prices of assets can vary significantly across multiple exchanges due to their decentralized nature. Users might have to sell their bitcoins cheaper or buy them more expensively than they would usually do on other, bigger exchanges due to price discrepancies between multiple exchanges.
STP in Crypto Exchanges – A Parallel to FX Interbank Liquidity
NEXUS 2.0 Industry’s First Crypto STP Built for Exchanges
The NEXUS 2.0 STP engine introduces the choice/option of STP order processing to Crypto Exchanges in addition to organic order books and synthetic market making.
Crypto orders can be processed upstream to a larger liquidity pool with enhanced risk management via STP through NEXUS 2.0, a proprietary liquidity aggregator and STP (Straight-Through Processing) engine that connects crypto exchanges to the aggregated liquidity pool of the industry’s largest players. As price quotes are pulled from several top exchanges, as opposed to a single source of liquidity, this results in higher quote frequency for more detailed charts, multiple liquidity tiers for large orders execution and ultra-tight spreads for cost-effective trading. There are also lower risks involved, due to NEXUS 2.0 playing an intermediary role to avoid any conflict of interest with traders.
By elevating crypto trading to the standards of forex-grade liquidity, the NEXUS liquidity network sets the foundational infrastructure for inter-exchange liquidity – a parallel to interbank FX liquidity.
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