Liquidity Building: Market Making on New Crypto Exchanges

Launching a new crypto exchange is exciting, but if you peek at many fresh order books, you might hear the sound of crickets. As professional market makers, we’ve seen countless new platforms struggle with the cold-start liquidity problem. An exchange without active trading is awkwardly empty, like a nightclub with no music. Liquidity is so crucial that one in three crypto investors cites it as a top concern when evaluating exchanges. Simply put: if your users face huge price slippage and barren order books, they’ll flee to deeper markets faster than you can say “HODL.” Without sufficient liquidity, traders encounter wide spreads and a poor experience, which quickly drives them to other platforms. Bootstrapping liquidity is the fundamental challenge for any new exchange.

The Liquidity Bootstrapping Challenge

Every new exchange faces a classic chicken-and-egg dilemma: you need traders to create liquidity, but you need liquidity to attract traders. Early on, few traders means low volume; low volume leads to wide bid-ask spreads; and wide spreads result in an unattractive trading experience. It’s a vicious cycle that leaves many new exchanges dead on arrival. Unlike established players who benefit from network effects, a newcomer must create. Order books won’t magically fill themselves just because you hung an “Exchange Open for Business” sign. We’ve seen teams spend millions on matching engine tech, only to launch and find their BTC/USD market as empty as a ghost town. Bootstrapping liquidity requires deliberate effort from day one, or else even the most hyped exchange launch will fizzle.

So what’s a scrappy new exchange to do? This is where market making comes in, your not-so-secret weapon to jump-start trading activity. Yet many founders underestimate what professional market makers do, and what it takes to integrate their liquidity into a fledgling platform. Before we dive into solutions, let’s get one thing straight: liquidity isn’t just a “nice-to-have.” It’s existential. An illiquid exchange is perceived as unreliable and will struggle to gain any traction. Conversely, a well-lubricated order book can be the difference between your exchange becoming the next Binance… or the next obscure trading venue nobody’s heard of.

Why Early Exchanges Need Market Makers

Market making is the art and science of injecting life into your exchange’s markets. In traditional markets, new venues always court market makers to seed activity, the crypto world is no different. Market makers are the lifeline of early-stage exchanges, because they ensure there are always buy and sell orders available. This means that when a user finally shows up to trade, they aren’t met with a 0×0 order book or a 10% bid-ask spread. Instead, they see tighter spreads and some depth, giving them confidence to trade on your platform. Cryptocurrency exchanges rely heavily on market makers to keep their platforms attractive to traders. By populating order books with continuous quotes, a market maker narrows the gap between buyers and sellers, reduces volatility and generally makes the trading experience smoother. A good market maker will maintain active order books so that trades can execute promptly at reasonable prices.

In the first months of an exchange, organic order flow is minimal, without assistance, your markets will be stagnant. Professional market makers step in to provide immediacy: they’re always ready to buy or sell when your users want to. This keeps the wheels turning. They’ll tighten those wide spreads and absorb some of the volatility shocks that would otherwise send early users running. Think of it like jump-starting a car: the battery (traders) is low, so the market maker provides the jolt of energy needed to get the engine running. Studies of crypto markets confirm that market makers serve as a critical layer of market infrastructure, creating confidence in an asset’s liquidity and keeping trading venues active even when organic volume is low. For a new exchange, engaging market makers isn’t just about looking busy, it’s about building credibility. A liquid exchange appears more reliable and reputable; having decent liquidity from day one signals to potential users that your venue is alive and kicking.

In short, market making is a critical component of early-stage exchange growth. It’s the bridge over the gap between “no one’s trading here yet” and “this exchange has action.” Without it, attracting that initial cohort of loyal traders is an uphill battle. With it, you stand a fighting chance to demonstrate a functional market, tighten spreads, and showcase a platform where trades can happen. As one industry analysis bluntly puts it: the exchange – market maker relationship is vital for the survival and growth of any crypto trading platform.

Misconceptions New Exchanges Have About Market Making

Despite its importance, market making remains widely misunderstood by many crypto entrepreneurs. We’ve heard all sorts of flawed assumptions from new exchange teams. Let’s bust a few of these myths:

• “Liquidity will come naturally if we list big coins.” Sorry, but simply listing BTC or ETH doesn’t guarantee active trading on your order books. Popular assets do attract attention, but without market makers curating the order book, even a BTC/USD pair can sit idle on a tiny exchange. Don’t assume whales or arbitrage bots will instantly swoop in to tighten your spreads, if your venue isn’t on their radar yet, your BTC market can be just as dead as an obscure altcoin.
• “We’ll rely on our users to fill the books.” In reality, early users are lurkers. No one wants to place the first order on an empty book, because they know they’ll get a terrible price or no fill at all. Expecting organic retail flow to bootstrap itself is wishful thinking. Without initial liquidity provision, those prospective users will log in, see nothing happening, and promptly log out. The first mover disadvantage is real in illiquid markets.
• “Market making is just fake volume or manipulation.” This one is common among crypto newcomers who conflate legitimate market making with nefarious practices. Yes, market makers do simulate activity, but done right, it’s neither fake nor illegal. It’s the grease that allows real traders to start trading with confidence. Professional market makers aren’t here to pump your volumes with wash trades (in fact, reputable firms avoid that). They maintain fair, two-sided markets. An exchange that misunderstands this might either avoid market making (and suffer empty books) or hire unprofessional firms that engage in shady volume tricks. Both are dangerous paths.
• “Any decent trader can be our market maker, we’ll do it ourselves.” Running a consistent, around-the-clock liquidity strategy is harder than it looks. It requires robust algorithms, 24/7 monitoring, risk management and usually significant capital. Many new exchanges underestimate the operational complexity and cost. We’ve seen teams try to DIY their liquidity with one guy and a trading bot, only to end up with erratic spreads and costly errors. There’s a reason specialized market making firms exist, it’s a professional enterprise, not a side hobby.
• “One market maker is enough, we don’t need multiple.” While having at least one designated market maker is the minimum to avoid lifeless markets, the best exchanges cultivate a healthy ecosystem of liquidity providers. Relying on a single firm can concentrate risk and sometimes lead to complacency (or outages if that firm goes down). New exchanges often underestimate how competitive and dynamic they should make their market-making program. Ideally, you want several market makers competing to tighten your spreads. Of course, in the very beginning, you might be lucky to convince even one but plan to expand that as you grow.

In summary, new exchanges often underappreciate the skill and importance of true market making. We’re not magicians, but we do bring the domain expertise needed to turn your platform from an empty lot into a bustling bazaar. Dismissing market making as optional or misunderstanding it as mere pump tactics are surefire ways to sabotage your exchange’s launch. The reality is that market makers are an indispensable part of healthy markets, the unsung heroes working behind the scenes to keep things liquid.

How Market Makers Decide to Support a New Exchange

Now for a dose of perspective from the market maker’s side of the table. Contrary to what some might think, market makers can’t support every upstart exchange that knocks on their door. The MM’s resources (capital, time, engineering effort) are finite, so they have to pick our partners carefully. There’s almost no limit to the effort that could be poured into providing liquidity, but in practice they evaluate each new venue with a critical eye before committing their trading engines to your platform. When a new exchange wants any serious market maker on board, here’s what they usually look at:

• Technical Infrastructure & API Quality

Top-tier market makers will scrutinize an exchange’s technical setup before onboarding. Their engineers typically comb through documentation and API endpoints with a fine-tooth comb, looking for simple integration paths, well-structured documentation and responsive technical support. If it takes weeks just to get connected or if endpoints behave unpredictably, that’s a red flag. Market makers will test for bugs, assess how the matching engine performs under load, and measure latency on both order placement and market data. A reliable and robust trading infrastructure, with WebSocket support, stable order matching, and real-time responsiveness is non-negotiable. Frequent API timeouts, inconsistent data or engine anomalies will raise concerns. Exchanges that invest early in technical excellence and provide a clean developer experience make themselves far more attractive to serious liquidity providers.

• Right Incentives (Economics of the Deal)

Providing liquidity is a business, and like any business, market makers look at the economics. Exchanges are expected to offer structured, performance-based incentive programs. This could include maker rebates, reduced fees or fixed retainers. What matters most is that these incentives are tied to measurable KPIs; tight spreads, minimum book depth, uptime on quoting and so on. Clarity and consistency in the program terms are essential; frequent changes or poorly thought-out incentive schemes signal instability.

Many exchanges mistakenly believe that a token allocation or equity offer is enough. The truth is, that most professional market makers prefer predictable returns, typically in fiat or BTC, over speculative instruments tied to a startup’s long-term success. Budgeting for real cash outlays in the early liquidity phase is critical. Without tangible volume or user flow, even generous rebates hold little appeal. Exchanges that understand and respect this reality will stand out to the top market making firms.

• Trust, Security, and Regulatory Clarity

Reputable market makers perform deep due diligence before deploying capital or infrastructure on any new venue. Trust is non-negotiable. If an exchange can’t demonstrate strong internal security, reliable custody solutions, and a plan for error handling, that’s a dealbreaker. No firm will risk its capital with a venue that may mismanage funds or technical failures. Provisions to compensate for exchange-side losses or bugs are a mark of maturity and professionalism.

Just as important is regulatory positioning. Exchanges operating in legal grey zones, with vague or absent KYC/AML policies will likely be avoided. Professional liquidity providers want to see clean legal frameworks, signed service agreements, and a compliance-first attitude. Add to this the founders’ reputation, past track records and funding situation, and a full risk profile begins to emerge. Exchanges that appear stable, transparent, and future-focused are far more likely to secure top liquidity partnerships.

• User Acquisition Strategy

One thing market makers often evaluate is whether an exchange has a realistic plan to attract actual traders. If the entire liquidity strategy hinges on hiring one or two market makers, it’s a warning sign. Liquidity providers don’t want to quote into a vacuum, or worse, trade only against each other.

What they want to see is a strategy to generate a non-toxic, organic flow. This could come from regional campaigns, listings with strong communities, affiliate outreach or tailored institutional relationships. Questions they’ll ask include: How many users are expected in the first quarter? What’s the plan to convert listings into volume? Are there marketing or referral budgets set aside? A promising exchange will treat liquidity providers as one layer in a broader growth engine, not the whole engine.

One more thing we gauge is your plan to attract real traders. If your entire strategy is “hire a market maker and volume will magically appear,” that’s a red flag. The truth is, nobody wants to provide liquidity to an exchange that only hosts other market makersreddit.com. We need to see that you’re actively working to bring in non-HFT, organic flow – whether through marketing, unique products, or regional networks. “Non-toxic” order flow (i.e. real buyers and sellers, not just arbitrage bots) is the ultimate prize that makes our liquidity provision worthwhilereddit.com. If we suspect that we’ll be quoting prices to ourselves in a vacuum, we’re much less enthusiastic. A savvy market maker will ask pointed questions like: What’s your user acquisition strategy? How many active traders do you expect in the first three months? Are you listing tokens that have communities who will trade them? We’re not just being nosy – we’re assessing whether our liquidity will actually facilitate genuine trading or just be ornamental.

User Acquisition Strategy

Another critical factor market makers evaluate is the exchange’s ability to attract actual traders. If the entire strategy is “bring on a market maker and volume will follow,” that’s a major red flag. No liquidity provider wants to maintain markets solely for other market makers. A venue that lacks non-HFT, organic flow—retail or institutional—is unlikely to sustain meaningful liquidity.

Top-tier market makers will look for signals that the exchange is actively working to bring in “non-toxic” flow: real buyers and sellers who aren’t just arbitraging spreads. This might include regional outreach, product differentiation, marketing campaigns, or curated token listings with active communities. Savvy firms will ask pointed questions: What’s the expected user growth in the first quarter? What acquisition strategies are in place? Are listed assets chosen with trading communities in mind? These are not trivial questions—they are used to assess whether the liquidity provided will actually facilitate genuine trading or simply sit idle.

Building Sustainable Liquidity Together

Bootstrapping liquidity is not a one-sided task. Market makers and exchanges must collaborate intentionally and pragmatically. A professional liquidity provider brings the algorithms, capital, and know-how; the exchange contributes to platform quality, user growth and incentives. Neither party can create a functional market in isolation.

Exchanges that view liquidity providers as strategic partners, rather than contractors, build the trust and operational foundation needed for success. The most resilient exchanges align incentives, minimize friction and maintain technical reliability. The ones that succeed do so because they understand that sustainable liquidity is a system: early support from market makers leads to real trading, and real trading attracts more users.

There is no shortcut to building markets, but there is a proven path. Exchanges that respect the process, invest in infrastructure and collaborate with their liquidity partners are the ones that rise from obscurity to relevance. Once real traders arrive, the rest follows.

Further Readings:

• Liquidity is the Greatest challenge for Crypto Exchanges
• The Most Misunderstood Role in Crypto: Market Makers Explained
• Crypto Body Unveils Market-Making Best Practice – The Full FX
• Exploring The Role Of Market Makers In Crypto – Coin Bureau
• How to choose a market maker for your Web3 project – Cointelegraph