What to Know:
- Economist Alex Krüger advocates for regulated market makers in crypto to prevent extreme price drops.
- Traditional finance market makers have a legal duty to maintain orderly trading, unlike their crypto counterparts.
- Implementing circuit breakers alongside market maker regulations could provide stability and protect market participants.
The need for market stability in the crypto space is being highlighted by economists, suggesting the introduction of regulated market makers similar to those on the New York Stock Exchange (NYSE). Economist Alex Krüger argues that the absence of such regulations leaves cryptocurrencies vulnerable to drastic price collapses during periods of high volatility. This call for change aims to address liquidity gaps and amplified price drops that occur when unregulated market makers withdraw from the market during crashes.
In traditional finance, designated market makers have a legal obligation to maintain orderly trading, continuously offering to buy and sell specific stocks, even during volatile periods. On the Nasdaq, entities are required to follow Rule 4613, which obligates them to post quotes within a set spread. Failure to comply can result in penalties, including the loss of their market maker status.
The discussion around market maker regulations also considers the need for protective mechanisms like circuit breakers, which are automatic trading halts triggered by significant price movements. While some argue against mirroring traditional finance, Krüger contends that the current unregulated system allows exchanges and market makers to exploit retail traders. Recent market turmoil, including significant losses in Bitcoin, Ethereum and XRP, underscores the urgency of implementing stability measures.
The implementation of regulated market makers and circuit breakers could provide a more stable and reliable trading environment for cryptocurrencies. This framework aims to protect market participants from extreme volatility and manipulation, fostering greater confidence in the crypto market. As the industry matures, adopting such measures may be crucial for its long-term growth and stability.
Source: Original article
