Liquidity Provision Concentrated. What That Means for Execution.

Market making in crypto consolidated after several cycles removed weaker participants. A small number of firms now provide a large share of the depth on major venues. The practical consequence shows up in the terms of providers like an OTC crypto desk rather than in the legislation itself.

What improved

Spreads on major assets narrowed and became more stable. The firms remaining are better capitalised and run more sophisticated risk management.

Depth at the top of the book is deeper than it was, for the assets these firms cover.

What did not

Coverage of smaller assets thinned. Market making is a business and marginal assets stopped justifying the capital.

Behaviour during volatility is more correlated. When a small number of firms run similar models, they widen at similar moments, which means depth disappears more uniformly than it used to.

The practical effect during stress

Displayed depth in calm conditions is a poor guide to what fills during a sharp move.

This is not new and it is more pronounced with concentration. An order that would fill cleanly on an ordinary day can walk several times further during a few minutes of volatility. Merchants encounter this on the acceptance side, where a provider serving funds and family offices carries the obligation.

For anyone executing size, the implication is to avoid market orders during volatile periods and to price through a desk that will quote firm.

What this means for quotes

A desk quote during volatility is wider for a real reason: the desk faces the same thinner market when it unwinds.

Quotes taken during calm periods are measurably better. For a trade that is not time critical, that is a free improvement.

The question to ask a liquidity provider

What size will you quote without hesitation in this asset. A specific number indicates they know their book.

What happens to your quoting during a sharp move. Everyone widens. The useful answer says by how much and whether they continue quoting at all.

Do you internalise, and roughly what proportion. Higher internalisation means less market impact and usually tighter pricing.

What to measure yourself

Effective spread against mid, per trade, by provider and size.

Twenty trades give you a real picture of who prices your flow well, which no marketing material provides and which changes over time as providers’ books change.

The structural advice

Maintain two relationships. Concentration in the market means concentration in your execution if you use one provider, and a provider widening or declining leaves you without a route. The provision that only matters in a failure is the one worth checking first, and a regulated crypto exchange states its position.

The existence of an alternative also improves your pricing more reliably than negotiation does.