Beneath the surface of exchange competition over fees, derivatives, and marketing campaigns lies one decisive factor: order-book depth. A deep book has tight spreads, low slippage, and large orders that do not move the price; it attracts market makers, retains retail users, and convinces issuers to list. A shallow book loses users at their first large trade regardless of acquisition spend. Depth does not appear by itself. It is supported by a professional market-making ecosystem in which market makers continuously quote both sides, exchanges retain them through maker rebates, low-latency connectivity, capital lending, and performance rewards, and issuers sometimes subsidize liquidity for their own tokens. SoonTech's white-label CEX market-maker onboarding and liquidity-incentive system lets operators organize market makers from day one through a measurable, settlable, and sustainable framework. This article dissects market-maker tiers, API integration, custody and capital, quote obligations, fees and rebates, incentive pools, performance monitoring, algorithmic strategies, risk isolation, joint market making with issuers, and long-tail cold-start solutions.

1. Why Market Makers Are the Exchange's Utilities

On an order book without market makers, sellers rest at 1.000 and buyers at 0.990, a 1 percent gap. A user buying 100,000 dollars worth immediately sweeps from 1.000 to 1.005 and prints an average far above expectation; the next user sees the candle spike and revert and stays away. That is the shallow-book experience. Market makers quote both sides near the mid, compress spreads to a few basis points, and stack size across price levels so large orders execute near mid.

Market makers take on passive inventory risk. Their resting bids get hit during fast drops and their asks get lifted during fast rallies, leaving them positioned against the market. They earn the spread plus rebates, but to survive volatility they must manage inventory, hedge, and cancel quickly. This is a professional business, not something any retail user can do.

For exchanges, market makers contribute more than visible depth. First, depth drives valuation: licenses, institutional due diligence, and M&A all examine spreads and depth. Second, market makers bring real volume through arbitrage and cross-exchange hedging that counts toward exchange turnover. Third, they are critical to new listings by stabilizing opening prices. Fourth, they stress-test APIs with hundreds of placements and cancels per second, exposing issues before retail hits them. A serious CEX must treat market makers as its most important B2B customers rather than as advanced retail users.

2. Market-Maker Tiers and Due Diligence

Not every team willing to quote gets direct access. Mature exchanges tier market makers and match each tier with rights and obligations.

Standard market makers (Tier 1) complete KYC, sign a market-making agreement, and provide basic trading history. They receive standard maker rebates but no dedicated low-latency channel or lending. This tier suits small teams, regional market makers, and new quant shops.

Professional market makers (Tier 2) must show three-plus months of market-making history on major exchanges, assets-under-management thresholds, and strategy descriptions. They receive lower latency, higher rebates, and relaxed rate limits.

Core or Designated Market Makers (Tier 3 / DMMs) sign a formal DMM agreement per trading pair that defines spread, depth, and uptime obligations in exchange for top-tier rebates, dedicated account managers, co-location, lending lines, and sometimes input into listing decisions. DMMs are typically globally recognized firms whose names themselves signal credibility.

Issuer-sponsored market makers are funded or employed by a project to support its token. Their capital comes from the issuer while the exchange provides venue and oversight. Because the arrangement creates manipulation risk, it must sit firmly under market surveillance.

Due diligence is not only about capital. Exchanges examine where the firm is licensed, whether it has a compliance officer, third-party audits of its trading system, prior penalties, and AML or sanctions exposure. A market-maker incident damages an exchange's reputation and license far more than a retail-user incident.

3. API Access: REST, WebSocket, and FIX

Market makers rarely use web or mobile UIs; they connect through APIs. SoonTech provides three channels.

REST APIs handle order placement, cancellation, order queries, positions, and accounts. REST is simple to implement and debug but costly in latency due to HTTP handshakes, so market makers use it for non-latency-sensitive work such as history, statements, and low-frequency orders.

WebSocket APIs are the primary channel. A long-lived connection receives real-time market data, order status, and fills, and sends orders and cancels back. WebSocket avoids repeated handshakes and pushes end-to-end latency into the low milliseconds. SoonTech supports binary Protobuf WebSocket, connection multiplexing across accounts and instruments, and microsecond timestamps.

FIX gateways serve traditional finance market makers. FIX is the standard protocol in equities and FX, and many traditional firms already run FIX-native stacks. The SoonTech FIX gateway is FIX 4.4 compatible with standard session management, sequence resynchronization, certificate authentication, and source-IP allow-listing, letting firms connect with minimal code changes.

Across every channel, market makers care most about order-entry latency, cancel latency, and market-data interval. SoonTech deploys probe accounts in every datacenter that send synthetic orders at a fixed cadence and publish end-to-end latency to dashboards; market makers see their own latency stats. Latency spikes trigger alerts for the SRE team.

4. Custody and Capital: Multi-Address, Hot/Cold, and Lending

Market-maker capital is typically much larger than retail capital, and custody must balance security and efficiency. Funds commonly sit in three layers.

Cold wallets hold the bulk of market-making capital with fully offline signing and rebalancing weekly or monthly. Withdrawals require multi-party signatures and process only in fixed windows.

Hot wallets keep a small portion on-exchange for intraday quoting, with instant settlement and MPC or multi-sig control so automated strategies can rebalance quickly.

Hedging wallets hold funds at other major exchanges such as Binance, OKX, or Bybit. When a market maker accumulates a position from passive fills here, it immediately hedges with an opposite order there to avoid directional exposure.

For smaller teams with thinner capital, exchanges can offer market-maker lending: the exchange or a lending partner lends assets against collateral at a daily rate. This broadens participation but requires strict leverage caps, typically three to five times, maintenance margin, and use-of-funds restrictions that prevent directional positioning.

Custody also requires asset segregation. Market-maker assets must be held in separately identified custody accounts or trust structures distinct from exchange proprietary assets. In an insolvency or regulatory freeze, those assets must be identifiable and returnable. Since FTX this has become a non-negotiable criterion for market makers choosing a venue.

5. Quote Obligations: Spread, Depth, and Uptime

Rebates are not unconditional. The agreement must define market-making obligations or market makers can post meaningless tiny orders and collect rebates. An enforceable set covers three dimensions.

Maximum spread: the bid-ask at top of book cannot exceed a set number of basis points. Majors may require 3 bps, mid-caps 8 bps, long-tail 20 bps. Spreads can widen during defined volatility events.

Minimum depth: the cumulative quoted size at each level must exceed a threshold, for example 10,000 dollars at top of book and 100,000 dollars across the top five. Depth ensures large orders do not punch through the book.

Uptime / quoting ratio: the share of trading hours during which the market maker maintains compliant quotes. Majors typically require 95 percent or more; long-tail pairs 80 percent. Scheduled maintenance and defined extreme events are excluded.

These dimensions are sampled per second or per minute and fed into a performance system. Misses trigger tiered rebate deductions or downgrades; sustained non-performance terminates the relationship. Obligations must be realistic: excessively tight spreads and oversized depth will drive market makers away, while loose terms do nothing for the book. New pairs start with relaxed terms that tighten as genuine liquidity grows.

6. Maker Rebates, Negative Fees, and Tiered Fees

Maker rebates are a core revenue stream for market makers. When a resting maker order fills against a taker, instead of being charged a fee the maker receives a rebate while the taker pays a higher fee. This is the maker-taker model.

For example, with a taker fee of 5 bps and a maker rebate of 1 bp, a user taking 10,000 dollars pays 5 dollars while the market maker whose resting order filled receives 1 dollar. This rewards liquidity provision and charges liquidity demand.

In competitive markets, negative fees are common: makers pay nothing and takers may also pay nothing or even be subsidized, with the exchange funding the subsidy from listing fees, derivatives fees, or liquidation penalties. Major exchanges have long run zero or negative fees on BTC/USDT to attract market makers and high-frequency flow.

Tiered fees align grades with privileges. A typical structure runs ordinary spot users at 10 bps maker / 15 bps taker, VIP1 through VIP10 down to 0 / 2 bps, and market-maker grades beyond VIP: MM1 at 1 bp rebate / 5 bps taker, MM2 at 2 bp rebate / 4 bps taker, MM3 at 3 bp or more. Futures and options differ in detail but share the principle of using price signals to guide liquidity.

Fees are neither as high as possible nor as low as possible. High fees drive flow away; low fees erode revenue. A useful heuristic is that majors must match global comparable rates or market makers leave, long-tail pairs can charge more because liquidity provision costs more, and derivatives fees must cover insurance funds and risk controls.

7. Liquidity Incentive Pools and Leaderboards

Beyond routine rebates, exchanges set up liquidity incentive pools that reward top-performing market makers each week or month. Pool funding comes from exchange revenue, issuer contributions, or a fixed share of listing fees.

Pools can be distributed in several ways. By volume is simplest but invites wash trading. By quoting quality using a liquidity score derived from uptime, spread, and depth is fairest. By instrument dedicates pools to specific new or long-tail pairs so market makers can choose where to compete.

Leaderboards show market makers their per-pair uptime, average spread, volume, rank, and projected reward. Boards can be pseudonymous or public; public rankings give top firms brand exposure in addition to cash.

Two pitfalls deserve attention. First, winner-takes-all designs that let the top firm capture 80 percent of the pool alienate smaller participants; top-N equal share or score-proportional distribution broadens participation. Second, opacity around rules, measurement, and payouts breeds suspicion. Distributions, scoring, and grant records should be transparent and ideally published as downloadable statements or on-chain records.

8. Market-Making Performance Monitoring

Market-maker management is continuous, not a one-time signing. Operators need real-time monitoring of several metrics: top-of-book quotes, spread, depth, and quoting ratio per market maker per pair; per-minute, hourly, and daily uptime and compliance; inventory changes and hedging efficiency; volume share, cancel ratios, and self-trade counts; capital size, margin ratio, and liquidation events.

This data serves market makers, who see their own performance and rewards in their portal, and operators, who detect non-performance, wash trading, and excessive inventory. Alerts fire when major-pair spreads widen, a market maker misses targets for an hour, margin approaches liquidation, or self-trades spike.

Issuer-sponsored market makers warrant extra scrutiny due to stronger manipulation incentives. Warning signs include repeated price pushes in the final seconds before close, on-chain flows between the market maker and issuer wallets, repeated spoofing at key support or resistance levels, and self-trade rates well above peers. Evidence must be preserved and acted on under the market-making agreement.

9. Automated Market-Making and Algorithmic Strategies

As competition intensifies, manual market making is essentially extinct and firms run algorithms. Common strategies include:

Classic market making quotes symmetrically around mid, dynamically adjusts spread by volatility, and skews quotes after fills to nudge inventory back to neutral.

The Avellaneda-Stoikov model is the academic benchmark that computes optimal bid and ask from inventory, volatility, and time decay, and is widely used by quant firms.

Cross-exchange hedging quotes on this exchange while hedging fills on major venues, earning the rebate and spread with almost no directional risk.

Statistical arbitrage trades related pairs such as ETH/BTC or SOL/ETH as long-short spreads that mean-revert.

Liquidity sniffing and MEV-style strategies detect large resting orders and front-run them; these are heavily restricted on centralized venues and may be classified as spoofing.

The exchange should not itself make markets except in temporary extreme events, but it should provide infrastructure for legitimate strategies: historical tick replay, backtesting, sandbox, and simulated matching. Firms that develop in a sandbox before production have materially fewer incidents at launch.

10. Risk Isolation and Self-Trade Prevention

High-frequency market making introduces risks that must be isolated at the system level.

Self-trade prevention (STP) blocks orders from the same firm's sub-accounts or related accounts filling against each other. Strategies include cancel newest, cancel oldest, cancel both, and decrement, configurable per market-maker group.

Order-rate limits cap orders and cancels per second even for top firms to prevent a runaway algorithm from flooding the matching engine. Caps scale by tier and can be throttled during incidents.

Kill switches let market makers cancel all resting orders and pause strategies instantly; exchange risk can also remotely trigger a kill switch as an emergency control.

Price bands reject or cancel orders that deviate too far from mark price, preventing erroneous quotes or manipulative intent from polluting the book.

Unified position monitoring tracks inventory, margin, and hedging balances across exchanges so a blow-up at one venue does not silently propagate.

These controls do not constrain market makers so much as protect them and the broader market. Professional firms prefer venues with strict risk and transparent rules because the depth there is genuinely valuable.

11. Joint Market-Making with Issuers

New listings concentrate market-making demand. Issuers want post-listing stability, tight spreads, and depth; exchanges want traffic and volume; market makers want issuer capital or downside protection. Three-way collaboration takes several forms.

Issuer funds, third-party market-maker operates: the issuer deposits its own tokens and stablecoins into the market-maker's account and pays a monthly fee plus a performance share. The market maker does not take price risk under the agreement; the issuer bears inventory risk. This is the most common structure.

Issuer funds with exchange oversight: the issuer locks funds in an exchange-controlled custody account, the market maker can only use them for quoting, and the exchange provides monthly performance reports. This keeps the exchange neutral and reduces collusion risk.

Liquidity as a Service: the issuer pays a third-party liquidity provider a subscription covering six or twelve months of market-making.

Exchange proprietary market-making: some exchanges use an in-house desk for new listings, but with strict information and account barriers to avoid conflicts with customer flow.

Operators must guard against extreme outcomes where the market maker becomes a bag holder or, conversely, where the market maker and issuer conspire to pump. Agreements must explicitly prohibit closing-price manipulation, coordinated hedging, and discounted OTC token transfers to the market maker, with penalties including fines and listing revocation.

12. Long-Tail Pairs and Cold-Start Design

Majors never lack market makers; the harder problem is long-tail pairs and new-listing cold starts. A new pair has no history, high volatility, and cautious market makers. Without intervention, spreads can exceed 5 percent at opening and alienate the first users.

Several cold-start approaches work. First, designated market-maker subsidies: exchanges and issuers guarantee a capped reimbursement for the first three months in exchange for continuous quoting. Second, AMM as a backstop: overlay an AMM curve on the order book that quotes when the book is empty and naturally recedes as order-book depth grows. This is the hybrid-liquidity model. Third, cross-exchange arbitrage incentives: let market makers quote between this venue and major exchanges, importing reference prices from deeper books. Fourth, phased trading rollout: open limit orders only, then market and futures after the book stabilizes; open to a small user cohort before the public.

Cold-start typically lasts two to four weeks, during which exchanges can temporarily lift maker rebates, cut taker fees, and fund dedicated pools. As genuine volume grows and spreads converge, incentives revert to standard levels. This "support through the first mile" materially improves listing survival rates.

Conclusion

Depth is the most honest metric an exchange has. It cannot be faked with copy or campaigns; it accumulates only through a long-running market-maker ecosystem. SoonTech's white-label CEX capabilities across market-maker tiers, API access, custody and capital, quote obligations, fees and rebates, incentive pools, performance monitoring, risk isolation, joint market-making, and cold starts give operators a mature commercial framework for engaging global market makers from day one. Treat market makers as customers, depth as a product, incentives as investment, and risk as a boundary, and the book will thicken, users will stay, and the exchange will compound.

FAQ

Q1: How can a new exchange with no brand attract market makers?

A: Start with competitive maker rebates and negative fees, have issuers fund guaranteed liquidity pools, and provide low-latency APIs, a FIX gateway, sandbox backtesting, fast KYC, and a dedicated account manager. Market makers care most about being able to earn, withdraw, and avoid manipulation; when those are in place, word travels quickly in the community.

Q2: Does the exchange cover market-maker losses?

A: Generally no. Market making is a self-funded business, and the exchange provides venue and incentives. For new-listing cold starts or under a DMM agreement, the exchange or issuer may provide a capped subsidy, with triggers and ceilings explicitly defined in the agreement.

Q3: How do you detect wash trading by market makers?

A: Monitor self-trade rates, counterparty concentration, cancel ratios, immediate round-trip patterns, and inventory turnover, combined with STP data and on-chain fund flows. Wash accounts typically show high-frequency small-size circular trades, near-zero inventory, and repeated fills with a small set of counterparties.

Q4: What happens if market-maker funds are stolen or the exchange is hacked?

A: Market-maker assets must be segregated from exchange proprietary funds with MPC or multi-sig, hot/cold tiers, and insurance. The exchange should publish regular Proof-of-Reserves. In an incident, insurance funds and exchange reserves are applied to customer losses in a predefined order, with immediate investigation and disclosure.

Q5: Can an issuer make the market for its own token?

A: Yes, but it must disclose this to the exchange and accept heightened surveillance. Self-market-making easily crosses into manipulation such as closing-price marking, wash trading, and insider trading; engaging an independent third party and locking funds under exchange oversight is generally preferred.

Q6: Is hybrid AMM or a pure order book better?

A: Each suits different contexts. Majors with ample liquidity favor pure order books for tighter spreads. Long-tail and new pairs benefit from an order-book-plus-AMM hybrid for cold starts. Fragmented liquidity settings such as prediction markets and NFTs may use AMMs entirely. SoonTech supports switching or stacking these per instrument.

🌐 Build secure and scalable Web3 platforms with SoonTech.

Explore our solutions for White Label Crypto Exchanges, Prediction Markets, MPC Wallets, Matching Engines, Liquidity Integration, and Compliance.