If you actively trade on cryptocurrency exchanges, you've probably heard of market makers. But what are they really? And why does their activity raise so many questions among retail traders?

Let's figure it out now. First, liquidity providers are not just market makers. That's a broader concept. The category of LP includes regular users who put their tokens into liquidity pools on decentralized platforms, large investors, venture funds, hedge funds, and, of course, the market makers themselves. But market makers are a separate class. They are professionals, companies, or large funds that actively create the market through matching buy and sell orders.

The difference is simple: an ordinary LP passively sits in the pool and earns commissions. A market maker actively trades, places orders, cancels them, tries to profit from the spread and price movements. These are completely different approaches.

Now, here’s where it gets really interesting. Market makers on centralized exchanges almost always sign an NDA — a non-disclosure agreement. Why is this important? Because they gain access to information that regular traders do not see. This includes trading volumes, large orders, liquidity flows, API access. The exchange can offer them reduced fees, priority when listing new tokens. If this information leaks, it can be used for manipulation. That’s why an NDA is not just a piece of paper — it’s the exchange’s insurance.

Here’s an example: a new token is about to be listed. The market maker learns in advance about liquidity and volumes, and sets up their strategy. This gives them a huge advantage over others.

Now, about manipulation. And this is where it gets wild. Market makers are not just guys creating liquidity. They are sophisticated players with huge capital and algorithms, using several techniques to extract profit.

First — spoofing. The market maker places a large buy order, creating the illusion of demand, pushing the price up. Once the market reacts, the order is canceled, and they sell the assets at a higher price. A classic fake.

Second — pump and dump. A group of market makers coordinate to pump the price of an asset through mass buying, retail traders see the movement and join in. When the price peaks, the market makers sell everything, the price drops, and retail traders are left with losses.

Third — stop hunting. Market makers monitor liquidity levels, see where stop-loss orders are clustered, and intentionally push the price there. For example, if they see many stops at $40,000 on BTC, they push the price to that level, gather liquidity, then reverse the market. Cruel but effective.

Fourth — wash trades. The market maker simultaneously buys and sells assets, creating the appearance of activity and liquidity. This attracts other traders, and the market maker takes advantageous positions before real movements occur.

Fifth — spread manipulation. The market maker can narrow the spread to attract more buyers into the market or widen it to make buying more difficult and induce panic.

Who’s behind all this? Specialized firms with access to large capital and advanced technology. Jump Trading is one of the largest high-frequency trading firms. Citadel Securities controls a significant portion of trading volumes. Jane Street is known for algorithmic trading. Alameda Research was the biggest market maker in crypto until the FTX collapse. Often, the market makers are backed by the exchanges themselves or large institutional players who fund them to ensure liquidity.

Why do exchanges even need market makers? Because they provide liquidity; without them, spreads would be huge. They support the price on new trading pairs, keeping it within reasonable fluctuations. And the paradox is that they both create the market and protect it from chaos.

Here’s how it works in practice: an exchange prepares a new token listing, signs a contract with a market maker, who in advance receives tokens at a fixed price. When trading opens, the market maker places large buy and sell orders, creates a narrow spread, and smooths out sharp fluctuations. In the end, they earn commissions and the difference between buy and sell as profit.

What’s the essence? Market makers appear as market stabilizers, but in reality, they are players manipulating the price for their own benefit. They have direct ties to exchanges, sign NDAs, and operate with huge capital and algorithms. Ordinary traders often fall victim to these manipulations because market makers have informational and technical advantages. Essentially, these are whales controlling the market from the shadows, and most retail traders are unaware of it.