When Christoffel and Jan Raphoen invented market-making in Amsterdam around the 1620s, their job was small in scope: Buy shares of Dutch East India Co., the world’s first publicly traded company, from people who wanted to sell, and sell to those who wanted to buy. The brothers were “the missing link,” according to historian and economist Lodewijk Petram, connecting buyers and sellers “who happened to be not at the same place at the same time.” Four centuries later, the role of market makers hasn’t really changed. Whenever there’s a financial asset to swap, they find a way to stand in the middle and rake a little money off the top in exchange for providing traders with the liquidity they need.
Today’s market makers are “high-frequency traders”—a term they hate—and are embedded in everything from stocks to bonds to derivatives. If you’ve ever bought a share of Apple Inc. on a free mobile-trading app, chances are you got it from one of the big Wall Street market-making firms. But these vital traders have never seen anything like cryptocurrencies. They’re salivating over a once-in-a-lifetime opportunity to trade a whole new set of assets. On the other hand, since cutting out middlemen is one of crypto’s guiding principles, the technology could also be a threat to their business.