What Is a Market Making Strategy? Can Individuals Do It?
This article is for beginners who have heard the term "market making" but don't know what it means, regular investors wondering if they can make money from it, and advanced users wanting to understand the difference between market makers and regular traders. After reading, you'll understand the essence of market making, its profit logic, and whether individuals can participate.
First, a question: When you place a buy order on an exchange, why is someone almost instantly selling to you? When you place a sell order, why does someone buy immediately?
The answer is simple—someone is waiting on the other side.
Those people are market makers.
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Simply put, market making involves placing both buy and sell orders simultaneously, profiting from the bid-ask spread while providing liquidity to the market. Imagine if there were no market makers: when you want to buy Bitcoin, you might not find a seller, and when you want to sell, you might not find a buyer. Prices would either swing wildly, or the bid-ask spread (the difference between the highest buy price and the lowest sell price) would become absurdly large.
What market makers do is: place orders at the bid price waiting to buy, and at the ask price waiting to sell. They don't bet on price going up or down; they profit from the tiny difference between the two prices.
How does market making actually make money? One example will make it clear.
Suppose the current market mid-price for Bitcoin is $100,000.
A market maker places a buy order at $99,990 and a sell order at $100,010.
Someone wants to sell, and the trade executes at $99,990—the market maker buys the coin.
Someone wants to buy, and the trade executes at $100,010—the market maker sells the coin.
Between this buy and sell, the market maker earns a $20 spread.
Each individual trade earns very little, but a market maker might execute hundreds or thousands of trades a day. Accumulated, this becomes a stable income. This is the core profit model of market making—earning from the spread, not from price direction.
What's the real difference between market makers and regular traders?
| Comparison Item | Market Maker | Regular Trader |
| Core Action | Places buy and sell orders simultaneously | Buys on bullish view, sells on bearish view |
| Profit Source | Bid-ask spread | Price fluctuations |
| Position Attitude | Aims to stay neutral (doesn't bet on direction) | Actively holds directional positions |
| Trading Frequency | High-frequency, continuous | Irregular |
| Fees | Usually lower, sometimes with rebates | Standard rates |
Market makers are "liquidity providers," placing orders and waiting for others to trade against them. Regular traders are "liquidity takers," directly consuming existing orders on the market. The roles are completely different.
Can individuals do market making? The answer is yes, but there are barriers.
First, the conclusion: Individuals can do it, but the method is entirely different from institutions.
Institutional market makers (like Wintermute, Jump Crypto) engage in high-frequency trading (HFT), using top-tier hardware, dedicated network lines, and custom algorithms, competing in milliseconds or even microseconds. They invest millions of dollars in infrastructure—something individuals simply can't match.
However, individuals have three alternative paths.
Path 1: AMM Liquidity Pools (Simplest, Best for Beginners)
AMM stands for Automated Market Maker. This is likely the lowest barrier way for individuals to participate in market making.
You don't need to write code, monitor charts, or place orders yourself. You just deposit two assets (like BTC and USDT) into a liquidity pool. The system automatically handles market making for you—placing orders on both sides, adjusting prices, and collecting fees.
Income Source: A share of trading fees. When someone trades in your pool, you earn a portion of the fees.
Risk: Impermanent loss. Simply put, if the price ratio of the two assets in the pool changes, the value you get when withdrawing might be less than if you had just held the two coins. However, if fee income is high enough, it can cover this loss.
Suitable for: Beginners who want passive participation in market making without hassle.
Path 2: Build Your Own Market-Making Bot (Requires Programming Skills)
If you have programming experience, you can write your own market-making bot.
The basic strategy logic is:
Buy Price = Mid Price × (1 - Spread Percentage / 2)
Sell Price = Mid Price × (1 + Spread Percentage / 2)
The bot continuously monitors the market price and periodically refreshes orders. If one side gets filled too much, causing the position to deviate from neutral, the bot adjusts quotes to bring the position back.
It sounds simple, but there are many practical considerations:
- Fee costs (taker fee rate)
- Risk of adverse price movements (being "picked off" by informed traders)
- Network latency and API stability
- Private key security
On-chain perpetual exchanges like Hyperliquid offer open APIs, allowing independent developers to participate in market making. But honestly, this is better suited for people with quantitative trading experience; beginners shouldn't try this right away.
Path 3: Delegate to Protocol Market Making (Compromise Solution)
Some protocols offer "managed market making"—you deposit funds, and the protocol executes the market-making strategy on your behalf, sharing the profits.
For example, Hyperliquid's HLP (Hyperliquidity Provider). Users can deposit funds into the protocol's market-making treasury and share in the market-making profits with the protocol. The income sources are more diverse than just collecting fees, but the risks are also closer to real market-making risks.
Suitable for: Those with a certain amount of capital who want to participate in market making but don't want to code.
What risks should individuals watch out for in market making?
Market making isn't passive income. There are several pitfalls you need to know.
Inventory Risk: This is one of the biggest risks in market making. If the market rallies unilaterally, your sell orders get continuously filled while buy orders don't, leading to a large short position—the higher the price goes, the more you lose. The opposite is also true.
Adverse Selection Risk: Some "smart money" specifically targets market maker orders—they have more information than you, and you always end up trading on the unfavorable side.
- Spread Compression: As more people engage in market making, profit margins get squeezed.
- Impermanent Loss: If you take the AMM route, this is an unavoidable risk.
- Technical Risk: Code bugs, network outages, API failures—any of these can cause losses.
Is individual market making worth trying?
My view is pragmatic.
If you are a complete beginner, start by testing the waters with an AMM liquidity pool. Invest a small amount to experience what "providing liquidity" and "impermanent loss" mean. Don't go all-in from the start.
If you have programming skills and are willing to tinker, try building a simple market-making bot on platforms like Hyperliquid. But it's recommended to run it with a very small amount of capital for a while to ensure the logic works before adding more funds.
If you have a larger capital base but don't want to code, you can research protocol market-making products like HLP. But again, start with a small test amount.
To be honest, it's hard for individuals to make significant money from market making. Institutions have advantages in hardware, capital, and information. What individuals can earn is mainly the spread on less liquid small-cap coins or in emerging markets. Treat it as a learning opportunity or a supplementary source of passive income, not a path to financial freedom.
Market making is essentially a "low margin, high volume" business—you earn little per trade, relying on volume and scale. Institutions have scale; individuals don't. So, for individuals, participating in market making is more about experience and learning than a get-rich-quick path.
If you want to try after reading this, I suggest starting with an AMM liquidity pool—the lowest barrier and least hassle. Once you understand the basic logic, you can consider going further.
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FAQ - Frequently Asked Questions
Q: Which is more profitable, market making or trading coins?
There's no standard answer. Market making earns stable, thin profits. Trading coins profits from directional big moves. Market making is more stable but has lower upside; trading is more volatile but can lead to big losses or big gains. It depends on your risk preference.
Q: How much capital is needed for market making?
AMM liquidity pools have a very low barrier; a few hundred dollars is enough. If building your own bot, it's recommended to start with at least a few thousand dollars—too little, and you won't even cover the fees.
Q: What exactly is impermanent loss?
It's the difference in value when you withdraw your assets from a liquidity pool compared to if you had simply held the two assets, caused by a change in their price ratio. It's not an "actual loss" but an "opportunity cost," though you do receive less money upon withdrawal.
Q: What's the biggest difference between individual and institutional market making?
Institutions have low-latency hardware, dedicated network lines, professional teams, and massive capital. Individuals can only find opportunities in the gaps using algorithms and strategies. Simply put, institutions profit from scale, while individuals profit from opportunities "others haven't noticed."
Q: Which path do you recommend for a beginner in market making?
AMM liquidity pools. Don't think about writing a bot right away. First, understand the basic concepts.
