Chapter 10: Liquidity Costs & Market Making
⚠️ Order-of-magnitude estimates (2026), FX USD 1 ≈ RM 4.7. Liquidity cost depends heavily on number of pairs, target depth and market conditions — highly variable.
10.1 Why liquidity is the “invisible big cost”
An exchange without depth means huge spreads, severe slippage, and users who leave on arrival. Worse:
- The SC requires a “fair and orderly market” — a thin book is seen as manipulable, hurting compliance.
- The cold-start paradox: no users → no liquidity → poor experience → no retention. A new exchange must spend to buy/build liquidity to break the loop.
MM/LP/aggregation] -.breaks loop.-> Thin
💡 Key compliance point: market-making inventory must be the exchange’s own capital, strictly segregated from client assets — you cannot market-make with client funds. So this is on top of the RM 5M locked capital in Chapter 9.
10.2 Three ways to source liquidity
to large venues] Self --> S1[own inventory + quant team + MM bots] Third --> T1[B2C2/Wintermute/GSR/
Cumberland/Kairon etc.] Agg --> A1[white-label routing to
Binance/OKX etc.]
1) In-house market making
Hold inventory and quote both sides with MM bots.
- Inventory capital: stock across own hot wallets + partner venues (multiple pairs), tying up RM millions to tens of millions of own funds.
- Team: quant traders + MM-strategy engineers (RM 12k–30k/mo each).
- Systems: MM engine, hedging, smart order routing (SOR).
- Risk: inventory exposure can lose money in volatile markets.
2) Third-party market makers / LPs (most common)
Contract a professional MM to inject depth. Examples (do your DD): B2C2, Wintermute, GSR, Cumberland, Jump, Kairon Labs, Flowdesk.
| Model | Cost character |
|---|---|
| Monthly retainer | USD 5,000–50,000+/mo (RM 24k–235k/mo), by pair/depth |
| Token loan | You lend your own tokens for MM; you bear default/price risk |
| Spread / profit share | The MM earns the spread; you share or concede |
| Loan + call option | Common for platforms/projects; options as compensation |
Most new exchanges sign 1–2 MMs for majors; monthly cost commonly RM 50k–300k, plus possible inventory lock-up.
3) Liquidity aggregation / bridging (often bundled with white-label)
Via a white-label vendor (B2Broker, AlphaPoint, ChainUP), route/mirror your book to large venues (Binance, OKX).
| Cost | Magnitude |
|---|---|
| Liquidity connection fee | USD 2,000–15,000/mo (RM 9k–70k/mo) |
| Spread markup | Embedded per fill |
| Hedging trade fees | Fees you pay hedging upstream |
- Pro: fast depth, low inventory pressure.
- Caution: you’re effectively brokering/hedging — upstream fills, price moves and network fees are your cost, and you depend on the vendor’s stability.
10.3 Hidden liquidity costs (easily missed)
| Hidden cost | Note |
|---|---|
| Hedging slippage / spread | Loss when closing exposure upstream |
| Inventory price risk | Unrealized loss when markets fall |
| Cross-venue transfer / network fees | Gas/withdrawal moving coins between own wallets and partner venues |
| Custody fees | If MM inventory sits at Fireblocks etc., by AUC |
| Cost of capital | Interest on borrowed inventory, or opportunity cost of own funds |
| MM incentives/rebates | Maker rebates reduce your net fee income |
| Per-pair stacking | Each added pair grows inventory & MM cost, linearly or faster |
10.4 Liquidity budget example (magnitude)
Illustrative: ~5–10 major pairs (BTC/ETH/USDT, etc.).
| Item | Estimate |
|---|---|
| MM own inventory (locked capital) | RM 3M – 10M+ (own funds, segregated from clients) |
| Third-party MM retainer | RM 50k – 300k / month |
| Aggregation/bridging fee | RM 10k – 70k / month |
| Quant MM team (if in-house) | RM 30k – 100k / month |
| Hedging/transfer/custody hidden costs | Variable, RM tens-of-thousands/month |
| Liquidity monthly cash subtotal | ≈ RM 90k – 500k / month |
| Extra own inventory capital | ≈ RM 3M – 10M (one-off lock-up, scalable) |
10.5 Folding into the total budget
Including liquidity, Chapter 9’s “three kinds of money” become four:
| Category | Magnitude |
|---|---|
| (1) Locked regulatory capital (shareholders’ funds) | RM 5M |
| (2) MM/liquidity inventory (own funds) | RM 3M – 10M+ |
| (3) One-time startup spend | RM 1.7M – 5.4M |
| (4) Recurring operating burn (incl. liquidity fees) | RM 0.82M – 1.88M / month |
→ Adjusted Year-1 total cash need ≈ RM 18.5M – 37M+.
Prudently, raise the liquidity-inclusive startup cash to RM 25M – 40M+ — especially for competitive depth across multiple pairs.
10.6 Practical ways to cut liquidity cost
- Few, high-demand pairs: launch only BTC/ETH/USDT-type majors; avoid inventory dilution across the long tail.
- Aggregate first, in-house later: start fast with third-party/aggregation; build in-house MM as you scale.
- Negotiate rebate structure: maker rebates erode fee income; balance maker/taker for depth vs profit.
- Tightly control inventory exposure: in-house MM needs real-time hedging and risk control.
- Put liquidity in the financial model: in Chapter 9’s 3-year model, liquidity is a recurring Year-1/2 cash drain, not a one-off.
Summary / action items
- Choose a liquidity path: in-house / third-party / aggregation / hybrid
- Reserve own funds (segregated from clients) for MM inventory: RM 3M – 10M+
- Engage 1–2 MMs; clarify retainer/token-loan/share models
- Assess white-label aggregation fees and spread cost
- Put hedging, transfer, custody, rebates into the financial model
- Narrow launch pairs to control total liquidity cost
➡️ Turn these numbers into a downloadable table: Chapter 11: Budget Model
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