Unlocking Value: Fair Price Discovery, the Role of Market Makers

Getting a token from inception to market is no mean feat and more often takes years of planning and commitment. Achieving fair price discovery and stability requires just as much commitment and energy. Generally speaking, market makers categorize the token pricing journey into four main phases: pre-generation construction, primary listing, price discovery and expansion, and cyclical growth. Each stage requires an intricate blueprint for success and contributes to the overall health of the token’s transition from private to public markets. This milestone is facilitated by a market maker’s (MM) construction of a pre-market order book, the strategy adopted for which significantly promotes or inhibits fair price discovery.

The following opinion editorial was written by Wesley Pryor the Founder of Acheron Trading.

But why does this matter?

What MM a project chooses to work with for pre-market planning and their public listing will dictate a lot in those crucial early stages. Should they choose to work with a firm that has a history of employing predatory and opaque deals and other tactics for their very benefit, it will likely cost the project and its community a great deal.

Structurally an MM, during a primary listing, has access to a large percentage of the circulating supply of an asset. Since they are tasked with seeding the initial liquidity for the listing, they can willingly choose to withhold some of it which, in turn, creates artificial scarcity in the order book. This has a knock-on effect on price, allowing it to trade to an unsustainable level. The MM then stands to gain significantly by taking that outsize position of the initial supply and selling it to those retail and institutional buyers at inflated prices, effectively short-selling the asset at an inflated price which can be very profitable for a short-term, parasitic operator.

Projects launching their token need to conduct substantial due diligence and remain pragmatic when selecting an MM to work with. They should prioritize a partner who is hyper-focused on transparency and symbiotic strategies vs. companies that have a history of controversy, market manipulation, and exploiting their clients for profit instead of prioritizing orderly price discovery in the token’s initial listing period.

There is an ongoing negative narrative in digital assets that perceives MMs as greedy manipulators, out to make a quick buck at the expense of their clients’ hopes and dreams. While unfortunately, this can be the case, there is an excellent cohort of credible and expert market makers operating in the space who know that fair deals, transparency, deep liquidity throughout the market cycle, and market efficiency, are paramount.

MMs know all too well the difficulties in getting your token from inception to market, and the tenacity it takes to do so successfully. Given this, shouldn’t they also understand it is their very duty to promote the efficiency of this process for the greater good of the client, their firm, and the accelerating digital assets industry?

When selecting a MM, projects should understand the business model the market maker is operating whether it’s designated (retainer), profit share, principal loan & call option, or hybrid. They should also drill into the incentives of the MM given the deal structure and understand how those incentives will translate to how the MM will assemble liquidity for the launch and subsequent price discovery. The project should scrutinize any conflicts of interest (such as coupling investment with market making). They should avoid running MM operations via an API key connected to their exchange accounts and opt for a segregated, fully custodial model, or loan model instead.

Additionally, projects should not be afraid to ask around their network for other founders’ experiences with different firms. Many founders have experiences they are hesitant to share publicly, but will readily provide valuable insights privately. Projects should also carefully scrutinize firms that are outlandish – throwing large parties, putting their company name on stadiums and football teams, and other marketing tactics. MM is a professional financial service that requires a high degree of integrity, professionalism, and technology, not flashy marketing campaigns.

Last and most importantly, projects should demand real-time transparency regardless of the financial structure. The lack of transparency in MM and exchange operations has caused significant harm to the industry as a whole in prior cycles, and we all need to set higher standards for those with whom we work.

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