Founder of Acheron Trading: 78.5% of market making methods disrupt the market
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Founder of Acheron Trading: 78.5% of market making methods disrupt the market
It's time to raise the bar, eliminate "parasitic" market makers, and ensure market makers play a key role in facilitating price discovery.
Navigating Web3 tides with focused insightsAuthor: Wesley Pryor, Founder of Acheron Trading
Translation: Chris, Techub News
Many people wonder: is every cryptocurrency just a "pump-and-dump" scam? Almost every time users see a token listed on an exchange, they observe the same phenomenon—price spikes sharply to unsustainable levels, then crashes rapidly, leaving participants holding devalued tokens.
Who drives this phenomenon? The answer lies with market makers—the firms hired by crypto projects to manage tokens (or liquidity) used for trading upon exchange listing.
Initial Listings in Cryptocurrency
Digital assets transition from private to public market trading through initial listings, similar to initial public offerings (IPOs) in traditional securities markets. However, there's one key difference: digital asset issuers often deliberately set low opening prices, resulting in significantly stronger first-day performance compared to traditional markets.
In traditional markets, stocks are primarily held by passive investors. In digital asset markets, tokens ideally circulate among active participants. The success of a token market depends on the strength of its holders. Unlike IPOs where investment banks set offering prices, token prices in public rounds are typically below fair market value, leading to higher first-day gains in digital markets.
During initial listings, market makers deploy a significant portion of the token’s circulating supply for sale. This is done via pre-market order books on exchanges, allowing market makers to provide liquidity before public trading begins—ensuring sufficient liquidity at market open.
However, some market makers prioritize short-term profits by filling order books with poor-quality liquidity, harming both communities and the projects themselves. This practice, known as "parasitic" market making, prioritizes market maker profits over market health.
Here's how pre-market order book building works for initial listings:
Parasitic: Parasitic market makers manipulate market sentiment by creating an illusion of "scarcity." They wait for retail buyers to enter, then short the token, placing high sell orders to absorb retail demand, causing the token price to drop. This strategy often causes irreversible market damage.
Short-term: Short-term market makers manipulate pre-market order books by placing large sell orders to fill their positions, maximizing fee revenue or completing OTC deals. This leads to rapid market exits and eliminates potential upside by dumping large amounts of tokens.
Symbiotic: In contrast, symbiotic market makers use insights into pre-market order flow to strategically establish opening liquidity, enabling long-term value creation and relatively controlled pricing. By providing liquidity to both buyers and sellers, symbiotic market makers facilitate orderly price discovery, allowing the asset’s true market value to emerge.
To classify different market maker approaches, we tracked token price performance during two critical periods: the first two days post-listing (hourly analysis) and the first two weeks (daily analysis). Data was sourced from primary trading platforms or reliable aggregation services and standardized for comparative analysis across projects. At the core of our analysis is Relative Change in Volatility (RCV), a methodology introduced in a prior case study.
Formula for Relative Change in Volatility (RCV). Source: Acheron Trading
The RCV formula measures changes in volatility with and without new all-time highs (ATHs). A positive RCV indicates insufficient supply on the order book, signaling inadequate pre-market liquidity. A negative value suggests oversupply, indicating overly aggressive market making and overvaluation. A neutral value implies balanced liquidity conducive to orderly price discovery.
To evaluate market maker behavior during initial listings, we applied the RCV method to 93 new token listings on Bybit, KuCoin, Binance, Coinbase, Kraken, and OKX since April 2024.
Classification of pre-listing methods. Source: Acheron Trading
We found that 69.9% of initial listings were classified as "parasitic," 8.6% as "short-term," and only 21.5% adopted the "symbiotic" approach. This means 78.5% of market making practices disrupted fair price discovery, negatively impacting both users and projects.
For "parasitic" listings, market volatility increased by 420% including ATHs, indicating severe supply shortages and inflated prices that eventually led to market abandonment. In contrast, "short-term" listings saw volatility decline by 34% when including ATHs, suggesting order book oversupply and poor initial supply management—benefiting only market makers while harming the community.
Both "parasitic" and "short-term" approaches severely distort token prices, reducing the likelihood of sustained market participation. In contrast, the "symbiotic" approach shows an RCV around ±20%, providing a stable foundation for fair and healthy token pricing.
As the cryptocurrency industry continues to grow in legitimacy and scale, market makers must address mismanagement in initial listings. Asset issuers and exchanges should collaborate with market makers and use RCV analysis to verify whether initial order books are properly constructed.
Data paints a poor picture of market makers. It's time to raise standards, eliminate parasitic players, and hold market makers accountable for their critical role in facilitating price discovery. Our industry deserves better.
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