Market making, along with algorithmic trading generally, entails specific terminology. We define some of the most commonly used terms below.
|base currency||The currency in a currency pair whose quantity is fixed as a single unit in a price quote.
For example, in a price quotation of ETH/DAI 100, ETH is the base currency and 100 is the amount of DAI exchangeable for each unit of ETH.
|centralized exchange (“CEX”)||An exchange which is operated by a central authority. In addition to order matching and broadcasting, the centralized exchange keeps custody of users’ assets.|
|decentralized exchange (“DEX”)||An exchange which is operates in a decentralized way, using smart contracts to facilitate the transacting in and settling of assets. Generally, one distinguishing feature of a decentralized exchange is that participants keep custody of their own assets in their own wallets; the DEX facilitates the direct wallet-to-wallet settlement between counterparties in a transaction.|
|maker||A party that places maker orders, and in doing so, provides liquidity to the market.|
|maker order||A “limit order”; which is an order to buy or sell an asset at a specified price and quantity. Execution of this order is not guaranteed; the order is only filled if there is a taker that accepts the price and quantity and transacts.|
|order book||A list of currently available (maker) orders on an exchange, showing all of the current buyer and seller interest in an asset.|
|quote currency||The currency in a currency pair whose quantity varies and whose quantity is denoted by the numerical figure of the price quote.
For example, in a price quotation of ETH/DAI 100, DAI is the quote currency and 100 units of DAI are referenced in this exchange.
|taker||A party that places taker orders, which execute immediately and fill a maker order.|
|taker order||A “market order”; an order to buy or sell a specified quantity of an asset which is filled immediately at the best available price(s) available on the exchange.|
|mid price||The average of best bid and best ask price in the orderbook.|
|hedging price||In cross exchange strategy, is the net cost of the other side of your limit order i.e., the cost of you making a taker order.
For example on your taker market, if you can buy 25 tokens for say a net price of $100 (other market makers have limit sell orders at a net price of 100 for all 25, e.g. 7.5 @ $99, 10 @ $100, 7.5 @ $101), then on your maker side, you would place an limit sell order for 25 @ $101 (assume 1% min profitability). If someone fills your sell order (you sell at $101), you immediately try to hedge by buying on the taker side at $100.