Genuine vs. Fake Crypto Market Makers: What Constitutes Legitimate Market Making?

Byline: Ekko An, Ryan Yoon

Translated by: Chopper, Foresight News

Anyone who has traded in the cryptocurrency market will recognize a familiar pattern: after a token listing, prices surge rapidly before quickly plunging, with trading volume evaporating almost overnight. Crypto investors often blame market makers for these extreme fluctuations.

This negative impression stems from entities that manipulate prices under the guise of being market makers. Influenced by such groups, the term "market maker" in the crypto industry has gradually become synonymous with pump-and-dump teams, causing continuous losses for investors worldwide. The U.S. Federal Bureau of Investigation (FBI) has prosecuted multiple institutions offering "manipulation services"; in South Korea, a team was sentenced to prison for inflating trading volumes under the pretext of providing liquidity. However, these are illegal operators; they charge fees and dump tokens, rather than truly fulfilling the market maker function of supplying liquidity.

Due to the lack of clear qualification requirements, anyone can claim to be a market maker, dragging down the credibility of the entire industry. Such manipulative behavior destroys market trust and has nothing to do with the core duty of market makers to provide liquidity.

Why Markets Need Market Makers

Market makers are core participants who simultaneously post bid and ask quotes, continuously supply liquidity, and ensure normal trading operations. To understand their value, one must first grasp their responsibilities. In South Korea, the terms "liquidity provider (LP)" and "market maker" are often used interchangeably.

Broadly speaking, liquidity provision is not limited to specific qualified institutions. Any order that does not execute immediately but sits in the order book waiting for a counterparty is called a passive order, effectively acting as a trading counterpart for others. Therefore, posting any passive order constitutes providing liquidity in a broad sense. High-frequency trading firms like Jump Trading, which use proprietary capital to fill the order book, fall into this category.

Just as currency exchange counters at airports guarantee travelers can exchange funds on demand, markets with market makers allow buyers and sellers to transact without waiting for each other. Investors and token issuers both benefit from this arrangement.

What Investors Gain: Lower Transaction Costs

Impact of Market Makers on the Order Book

Fees are not the sole determinant of investors' actual P&L; implicit costs have a greater impact: whether orders can execute immediately at expected prices, whether large orders cause price slippage, and whether significant price discrepancies exist across different centralized exchanges. The market maker's role is to solve these three issues: posting dense orders on both bid and ask sides, acting as a counterparty when none exist, and arbitraging away price gaps between exchanges. Consequently, investors can trade on demand at lower costs and secure nearly identical prices across platforms.

Reduced transaction costs: Narrower bid-ask spreads and less additional slippage from large orders

Always tradable: A counterparty is available at all times

Narrowed inter-exchange price gaps: Quoting across multiple exchanges simultaneously and relying on arbitrage to eliminate discrepancies

First, transaction costs decrease. The spread between the best bid and ask price is itself a cost. For example, if you buy at 1,010 KRW and immediately sell at 990 KRW, you incur a direct 2% loss. The larger the order size, the greater the loss. Once liquidity at the optimal level is consumed, orders consume the next tier, continuously raising the purchase cost. After market makers post dense orders, spreads narrow and depth increases at every price level, reducing slippage losses per trade for investors.

Second, investors can buy or sell at any time. In trading, the ability to open and close positions at desired moments is crucial. For illiquid tokens, sellers must wait for buyers, during which prices may continue moving unfavorably. Under normal conditions, market makers continuously post orders and act as counterparts. Even when trading is sluggish, sellers can execute immediately, and buyers do not need to wait for long periods.

What Token Issuers Gain

Market Making Through Token Lending

Token listings are not an end point, but a starting line. Continuous trading is required after listing so that users and investors can enter and exit freely, allowing the token to establish a fair valuation. Market makers help issuers maintain trading floors, yielding two key benefits for issuers:

Smoother trading: Small orders rarely trigger extreme price swings

Avoiding suspicions of price manipulation: Independent third-party market makers handle quoting, while issuers simply lend tokens

First, issuers obtain a market with stable trading. After listing, tokens are re-priced daily by the market: users buy tokens to use products, while investors trade based on project prospects. Only when participants can enter and exit smoothly can token prices remain fair. For thinly liquid tokens, a single small order can trigger massive gains or losses. This high volatility amplifies uncertainty and damages the project's reputation, regardless of its fundamentals.

Second, avoiding allegations of price manipulation. If issuers directly trade their own tokens, they easily face suspicion of pumping or dumping. Therefore, such transactions are handed over to independent market makers, with issuers merely lending the tokens. A compliant delegation contract typically includes clauses prohibiting price manipulation.

In short, investors can trade on demand at lower costs, and token issuers can create an environment where tokens circulate smoothly. The bid-ask spread earned by market makers is essentially a service fee paid by traders for immediate execution. As industry competition compresses this revenue margin, the liquidity dividend will ultimately benefit all market participants.

Differences Between Crypto and Traditional Financial Market Makers

The business essence of crypto market makers is no different from their traditional finance counterparts; the differences lie in the operating market environment and applicable regulatory rules. Stock market makers sign formal contracts with exchanges and operate within mature regulatory frameworks. In contrast, the crypto market currently lacks a rule set governing delegation contracts between market makers, centralized exchanges, and token issuers.

Eligible Entities: Licensed Institutions vs. Contract-Free Entities

In traditional finance, market making is a legally defined business. After passing reviews, financial institutions sign formal contracts with exchanges and receive fee reductions by continuously quoting as agreed. Exchanges publicly disclose which institution is responsible for making markets in which stocks, and long-established laws and precedents clearly define what constitutes compliant market making.

The crypto market is entirely different. Market makers perform identical work, yet there are virtually no institutional norms governing how they sign formal contracts with centralized exchanges, their respective obligations, or compensation structures. There are two core distinctions: First, a lack of contractual rules. No standards define what constitutes compliant market making, which institutions can accept exchange delegations, or how corresponding obligations and returns are structured. Second, structural risks unique to the crypto market. It is highly common for distorted arrangements to occur, such as centralized exchanges conducting proprietary trading themselves or market makers signing undisclosed private contracts with issuers. Regulators currently prioritize addressing explicit risks over building a complete framework, such as banning self-trading by exchanges or mandating the disclosure of undisclosed contracts.

The South Korean market faces the same issue. While regulations strictly prohibit centralized exchanges from engaging in proprietary market making, there is still no unified standard or formal process to determine whether a specific market-making business is compliant.

It is necessary to clarify a misconception here: regulatory gaps specifically target formal delegation contracts signed with exchanges/brokers; only such contracted businesses require licenses. Simply posting orders and trading with proprietary capital is inherently legal activity, regardless of licensing status. EU MiCA rules follow the same logic: using proprietary capital to make markets on an exchange does not require a license; qualifications are only needed when providing market-making services directly to clients.

Contracting Parties: Exchanges, Centralized Exchanges, and Token Issuers

The most intuitive difference between crypto and traditional market making is the ubiquity of delegation contracts from token issuers. Among these, the "contract-free proprietary trading model" differs fundamentally: market makers sign no agreements with anyone, charge no service fees, and trade solely using proprietary capital according to their own strategies, with liquidity being a byproduct. This corresponds to the broadly defined liquidity provision mentioned earlier, constituting legal business that does not involve license requirements. The token lending model is similar: as long as the market maker autonomously decides trades and bears price risk without direct issuer intervention, it is essentially identical to proprietary trading.

Risks concentrate in a specific type of issuer delegation contract where trading volume serves as the performance metric. Industry practitioners note that these contracts differ from exchange-initiated ones in funding sources and risk-bearing entities, featuring diverse terms ranging from spread settings to trading strategies during listing and unlocking windows. However, contracts with inflated volume as the core assessment goal easily induce wash trading and fake transactions; moreover, the fact that contract contents are kept entirely confidential is a major pain point in the industry.

Trading Scenarios: Single vs. Fragmented Markets

Comparison of Settlement Mechanisms with and without Central Counterparties

Stocks trade on a single exchange during fixed hours, where exchanges and clearing institutions monitor abnormalities and manage settlement risks. The crypto market operates 24/7 across numerous centralized exchanges globally. Lacking this protective mechanism exposes market makers to substantial risks.

First, the 24/7 operation of the crypto market scattered across multiple global exchanges easily creates cross-platform price gaps. Market makers must distribute assets across various exchanges to arbitrage these gaps; once network failures such as deposit/withdrawal suspensions occur, this arbitrage mechanism halts completely. Second, risk hedging tools are limited. Without circuit breakers or other protective mechanisms, and with prevalent high-leverage futures trading, market makers can only rely on futures positions to hedge spot inventory risk. The roughly $19 billion cascading liquidation event on a single day in October 2025 serves as a typical case: when an exchange triggers its Auto-Deleveraging (ADL) mechanism, even compliant market-maker hedging positions face forced liquidation. Stripped of hedging protections, market makers must urgently cancel orders, further destabilizing the market.

The fundamental problem is the absence of a central counterparty (CCP) settlement mechanism. In traditional financial systems, trades and settlements are guaranteed; crypto market makers must directly deposit assets into individual exchanges to trade. If an exchange collapses, as seen in the 2022 FTX incident, the market maker's assets held on the platform face total loss and are difficult to recover.

Five Major Shortcomings in the Current Market Making Industry

Market-making mechanisms form the foundation of smooth trading. However, without constraints, rampant pseudo-market-making businesses severely undermine market stability. We must precisely identify structural issues in the crypto market and seek viable solutions. The following five shortcomings are listed not because market making itself is flawed, but due to the lack of clear standards and monitoring systems to distinguish compliant liquidity provision from illegal price manipulation. The crypto market-making industry urgently needs a definitive standard set.

Conventional risk management operations are easily misjudged as market manipulation

From an outsider's perspective, routine risk management operations by market makers are easily mistaken for disrupting markets or manipulating prices. Industry practitioners have summarized four types of risk management behaviors most prone to misunderstanding. Even in well-regulated markets, such misunderstandings persist without predefined compliance boundaries.

The South Korean stock market provides a classic example. In 2021, the Financial Supervisory Service of South Korea ruled that frequent quote cancellations and modifications by market makers at nine brokerages constituted market disruption, issuing a fine of 48.7 billion KRW (approx. $35 million), which brought local market-making activities to a standstill. A year later, in July 2022, the Korea Exchange overturned the ruling: frequent quote adjustments were deemed necessary to fulfill obligations and manage risk; the cancellation/modification ratios of these institutions (95.68%–99.55%) closely mirrored NYSE levels (approx. 94.6%), and without clear prior standards, the actions were not illegal. Yet during the investigation period, the market lacked market makers for a full year.

Lacking clear standards in the crypto market means identical trading behaviors are labeled as manipulation by regulators and liquidity provision by defenders. Even compliant market makers cannot predict whether their trades will be deemed illegal, leading some institutions to withdraw from the market entirely.

The solution lies in establishing compliance standards in advance. The core judgment should focus on trading intent rather than simply checking cancellation frequencies. This aligns with U.S. regulatory philosophy: only prohibiting extreme quoting. Industry practitioners generally adopt the following criteria:

Whether operations occur within predefined contract and internal risk control parameters

Whether the operations genuinely reduce the market maker's own price risk

Whether orders are posted bidirectionally without a unidirectional goal to push prices

For instance, during severe volatility, a market maker selling spot assets while simultaneously buying an equal amount of futures may appear to be panic dumping to outsiders, but fundamentally hedges overall portfolio risk, constituting standard risk control. Conversely, spreading bearish news while heavily selling spot assets without hedging does not qualify as risk management.

If regulators and exchanges publish these standards in advance, compliant liquidity providers can operate with peace of mind, and illegal manipulative acts become easier to identify. The troubles caused by missing standards extend further: legitimate institutions face suspicion, while malicious actors exploit the ambiguity to impersonate market makers.

Volume-Inflating Entities Misrepresenting Themselves as Market Makers

The previous section discussed the misjudgment of compliant market makers; the reverse problem equally exists: many entities that are fundamentally not market makers claim to be so. Most "market maker scandals" in the market are caused by such third-party organizations operating under the guise of market making.

Gotbit stands as a representative case. Information from U.S. prosecutors indicates that between 2018 and 2024, Gotbit sold volume-inflation services, repeatedly wash-trading across multiple accounts to fabricate trading volume, aiming to inflate project token market cap rankings and facilitate listings on top-tier exchanges. Its founder pleaded guilty, received an 8-month sentence, and the company was fined with confiscated crypto assets worth approximately $23 million.

Some market makers have noted that the business model of such entities revolves around generating false trading volume while bearing zero price risk. In evaluation systems that solely track volume, their metrics often appear exceptionally strong.

Therefore, metrics for evaluating market makers must shift from "trading volume" to genuine tradable depth, since volume can be artificially manufactured through wash trading. Genuine industry market makers treat volume merely as a byproduct, focusing instead on:

The depth of the order book within a 1%–2% range above and below the current price

The magnitude of price slippage caused by a single fixed-size order

The proportion of time bid and ask quotes are simultaneously active

No matter how high the volume, if the order book is thin and small orders can drastically move prices, real liquidity does not exist. The core criterion is whether external traders can execute their desired sizes at fair prices. Using these metrics to screen market makers will gradually purge entities whose sole purpose is manipulation from the market.

For institutions accepting delegations from exchanges and issuers to provide outward-facing market making services, registration or licensing requirements can be mandated. Setting thresholds at the contracting stage can filter out Gotbit-type entities charging fees to manipulate prices right at the source. Participants engaging purely in proprietary trading with their own capital do not require licensure management. As stated previously, EU MiCA follows the same logic: using proprietary capital to make markets on an exchange does not require a license; qualifications are only mandatory when serving clients.

Hidden Contractual Parties and Conflicts of Interest Arrangements

Dual Agency in the MOVE Case

Even when selecting reputable entities, opaque contractual relationships inevitably lead to severe issues. In the crypto market, the contracting parties for delegation agreements between token issuers and market makers are frequently non-disclosed. With counterparties hidden in the shadows, distorted structures easily emerge where the same entity simultaneously acts as an agent for both trading sides.

The MOVE incident serves as a prime example. The Movement Foundation entrusted 66 million tokens (5% of total supply) to intermediary Rentech (claiming to be a subsidiary of Web3Port) to provide liquidity. Subsequent exposure revealed that within the same contract, Rentech acted simultaneously as the Foundation's agent and as Web3Port's agent, meaning one entity represented both sides of the trade.

These tokens were directly dumped into the market when they listed in December 2024 amid virtually no buying interest. Binance delisted the market maker and froze $38 million in related proceeds, followed by Coinbase suspending MOVE trading. The Foundation stated that this dump was never authorized. Though nominally labeled a liquidity service agreement, the contract contained no bidirectional quoting whatsoever, functioning merely as a unilateral dump of the project's tokens.

Therefore, the prerequisite for compliant market making lies in fair contract terms and transparent signing relationships. Substantively, compliant market-making agreements adhere to two core principles: market makers assume genuine price risk independently, and token issuers do not interfere with price trends.

In the token lending model, market makers combine borrowed tokens with proprietary capital to post bidirectional orders. Upon contract expiration, they return only an equivalent quantity of tokens, never receiving instructions to deliberately influence prices. A standardized contract must explicitly state:

Prohibition of wash trading

Prohibition of unidirectional price pushing

Maximum bid-ask spread limits

Minimum order posting sizes

The options model follows the same logic: as long as the market maker autonomously dictates daily quoting and the issuer only negotiates option terms without interfering in individual trades, it complies with the principles.

The second requirement is contract transparency. At minimum, exchanges and regulators must be able to verify which institution is making the market, token volumes, contract terms, and whether intermediaries simultaneously represent both parties. Starting in March 2026, Binance has already required projects to submit such information. Furthermore, just as stock exchanges publicly list equity market makers, investors also hold the right to see which institution serves as the market maker for a specific token.

Exchanges and Market Makers Belonging to the Same Entity

Segregation of Affiliated Market-Making Businesses

If a market maker is an affiliated entity of a centralized exchange, conflict-of-interest risks increase significantly. When a single company simultaneously operates an exchange, custody, and proprietary trading, affiliated market makers easily acquire privileges unavailable to other users.

FTX and Alameda Research serve as a classic case. Alameda was the core market maker on the FTX platform, receiving credit lines and privileges inaccessible to other users. U.S. regulatory investigations determined that FTX user funds flowed to Alameda for investments and to cover losses. Both institutions filed for bankruptcy in 2022.

The issue does not lie with the market maker identity itself, but rather with a lack of oversight over these credit privileges and operational spaces, ultimately leading to the misappropriation of user assets. The solution is not a blanket ban on affiliated market making, but rather business segregation and continuous monitoring. The International Organization of Securities Commissions (IOSCO) highlighted this type of conflict of interest as a key risk in its 2023 report, prompting Hong Kong to implement relevant regulatory rules shortly after. In February 2026, the Hong Kong Securities and Futures Commission (SFC) permitted exchange-affiliated entities to conduct market-making business, subject to three strict conditions:

Separation of the market-making business unit from exchange functions

Establishment of clear business boundaries between the two

Submission of an assessment report issued by an independent third-party professional firm to regulators prior to commencing market-making operations

This framework delineates boundaries and enforces continuous monitoring, preventing preferential treatment and insider information leakage. Should South Korean centralized exchanges choose to conduct market making via affiliates in the future, they should adopt these principles from the outset.

Lack of Mandatory Obligations During Crises Leads to Premature Order Withdrawals

Quoting Obligations and Incentive Mechanisms

The preceding four points address shortcomings under normal conditions; the final point is a crisis-triggered failure. The vast majority of crypto market makers lack mandatory performance obligations during downturns. As losses compound, the rational choice becomes canceling quotes, creating massive holes in the order book and accelerating market collapse. The aforementioned October 10, 2025 crash exemplifies this: with numerous crypto assets plummeting 40%–70% in a single day, industry practitioners widely agree that concentrated market-maker order withdrawals were the key catalyst for the market spiraling out of control.

To prevent collective order withdrawals during crises, mandatory performance obligations must be paired with corresponding incentive mechanisms. Institutions bound by enforceable contracts behave fundamentally differently under duress. Interviews with practitioners reveal instances where, despite macroeconomic headwinds triggering sharp declines in certain crypto assets, the designated market maker merely widened spreads without canceling quotes, thereby maintaining uninterrupted trading. These divergent outcomes stem directly from contractual obligations and risk management guidelines.

Traditional stock markets have codified this mechanism into regulation. The Korea Exchange (KRX) mandates that market makers post quotes for at least 80% of the trading day per asset and at least 90% quarterly; only meeting these targets unlocks incentives, while failures result in point deductions that, upon hitting a threshold, automatically terminate the delegation and bar the institution from new market-making assignments for one year.

A metric system is simultaneously required to measure performance effectiveness. Industry practitioners assess post-shock recovery not by price rebounds, but by whether trading functionality has been restored:

Whether widened spreads have narrowed back to normal

Whether canceled order volumes have been replenished

Whether price discrepancies across exchanges have converged

How long it takes to return to a normalized state

Establishing these indicators as performance benchmarks, accompanied by corresponding incentives, gives market makers stronger motivation to maintain quotes during crises rather than exiting abruptly.

Shifting from Post-Incident Penalties to Routine Regulation

Market distrust toward market makers is not unfounded. However, integrating insights from the previous section reveals that the root cause lies not in market making itself, but in the fact that anyone can claim the title, leaving the industry without standards to define "normal business operations."

South Korea's current legislation maintains this ambiguous state. We must delineate exactly where regulatory gaps exist: trading with proprietary capital, including utilizing borrowed tokens, is inherently legal. Like any other trade, if behavior constitutes price manipulation, it faces penalties; standalone proprietary trading is not unlawful. Gray areas primarily concentrate on delegated contracting businesses.

Current regulatory gaps in South Korea:

Absence of compliant channels for signing formal delegation contracts with exchanges; the current Virtual Asset Consumer Protection Act only prohibits price manipulation and lacks exemptions for compliant market making. Contracts signed between exchanges and market makers that carry quoting obligations risk being classified as manipulative.

No registration or licensing framework for delegated market makers.

Corporate entities struggle to open accounts on KRW-based exchanges to participate in trading.

In other words, the South Korean regulatory framework does not outlaw liquidity provision itself; it merely lacks a channel to formally delegate and bring contracted market-making businesses under regulatory oversight. Without a compliant regulatory pathway for contracted market makers, authorities are forced to penalize only after incidents occur.

Major global jurisdictions are advancing analogous rules: aligning unfair trading practices with traditional finance while officially recognizing compliant liquidity service providers within legislation.

European Union: MiCA fully took effect on December 30, 2024, banning crypto asset price manipulation; proprietary capital market making on exchanges does not require a license, whereas client-facing services do. Leading market makers such as Keyrock and Flowdesk obtained corresponding licenses in June 2026 to serve client businesses.

Hong Kong: Recognizing insufficient exchange liquidity, regulators allowed exchange-affiliated entities to conduct market making in February 2026, contingent upon strict business segregation.

Japan: Passed legislative amendments in July 2026 to incorporate crypto assets into the Financial Instruments and Exchange Act, adding prohibitions on insider trading.

Each region's starting path differs, but the overarching direction remains consistent. Aggressively cracking down on manipulation while carving out legitimate positions for compliant market makers within the regulatory framework. The South Korean market similarly needs to strike this balance; outright dismissal or unconditional glorification of market makers is unadvisable. Addressing the structural shortcomings outlined earlier, the required regulatory reforms can be summarized as:

Legislatively differentiate between compliant and non-compliant business practices. Adopt industry-standard criteria: whether market makers assume independent price risk, lack unidirectional price-control objectives, and allow external investors to execute normally. Clarify standards in advance to prevent routine risk management from being misclassified as manipulation.

Clarify qualification requirements for delegated market makers. Licensing and registration obligations apply exclusively to entities accepting exchange/issuer delegations with attached performance duties; proprietary capital liquidity provision remains unchanged and requires no qualifications. Filter out volume-inflating entities at the contracting stage.

Mandate contract transparency. At minimum, exchanges and regulators must verify market-making entities, token volumes, and contract terms; investors also retain the right to query the designated market maker for specific tokens.

Manage conflicts of interest. Market-making operations within exchange groups must undergo business segregation and external assessments, referencing the Hong Kong model.

Link obligations with incentives. Drawing on the KRX market-making mechanism, establish quoting maintenance obligations paired with corresponding rewards, motivating market makers to remain active during market crises.

Now is the ideal moment to construct this regulatory framework. The draft Digital Assets Basic Act submitted for review in June 2025 explicitly states: market-making business delegated by exchanges shall not be classified as price manipulation. In September 2026, senior officials from the South Korean Financial Services Commission (FSC) publicly affirmed they would evaluate the necessity of establishing a market-making regulatory framework. During the October National Assembly audit session, the FSC Chairman stated that the bill's text has been finalized, entered final deliberation stages, and the government aims to enact legislation within the year.

The core subsequent debate has shifted from whether to permit market making to what standards should govern its permission. However, the currently public version of the draft focuses primarily on exchange-delegated market making, mirroring traditional stock market models. Yet, the extensive malpractices discussed herein originate precisely from token issuer delegation contracts. Unless the legislation explicitly addresses issuer-delegated market making, the most glaring regulatory blind spot will persist.

Corporate access opening is intrinsically tied to this legislative effort. In February 2025, the South Korean FSC announced pilot plans permitting approximately 3,500 listed companies and professional investors to trade crypto assets. Relevant guidelines are still pending finalization and are being considered for simultaneous release alongside the Digital Assets Basic Act.

If market makers are excluded from regulatory oversight during the initial establishment of institutional capital entry rules, liquidity provisioning will remain operating outside the framework once corporate funds arrive. For South Korea's crypto market to securely absorb institutional capital, it must first shift entrenched perceptions of market makers. Relying solely on post-event penalties fails to retain compliant market makers and cannot filter out fraudulent imitators. The Digital Assets Basic Act represents a critical inflection point: transforming market makers from targeted enforcement objects into subjects of routine regulatory oversight.