Red Flags in Market Maker Proposals

You've decided your token needs a market maker. You reach out to a few firms. The proposals arrive. They all look similar: professional decks, promising language, big logos. But the details vary significantly, and some of those details should make you walk away.

Here are seven red flags to watch for.

1. Guaranteed volume

"We guarantee $X million in daily trading volume for your token."

No legitimate market maker guarantees volume. Volume is an outcome of market quality, organic interest, and broader market conditions. A market maker provides liquidity, which creates the conditions for volume. But they don't control how many people want to trade your token.

When a firm guarantees volume, they're implicitly telling you they'll create it artificially. That means wash trading: placing buy and sell orders against themselves to inflate volume numbers. This is illegal in most jurisdictions, detectable by sophisticated analysts, and will eventually be flagged by exchanges. Several exchanges have delisted tokens after discovering wash trading by their market makers.

If the proposal includes volume guarantees, ask directly: "How do you generate volume that isn't organic?" The answer will tell you everything.

2. Aggressive option terms on a token loan

"We require a 5% token loan with a 12-month call option at a 20% discount to current price."

Token loans with call options are an industry norm, but the terms matter enormously. Watch for:

Below-market strike prices. An option struck at 20% below current price starts in the money. The market maker profits immediately if they exercise. The strike should be at or above the current price if the arrangement is genuinely about market making, not about acquiring cheap tokens.

Long durations with no performance link. A 24-month option with no performance requirements means the market maker can provide minimal service for two years while holding a valuable option on your token. Options should be tied to performance milestones or have shorter durations with renewal based on results.

Large loan sizes. 3-5% of circulating supply is the typical range. If a firm asks for 8-10%, question why they need that much. More tokens in their hands means more of your float is controlled by a vendor with different incentives.

No transparency on usage. Ask specifically: "What do you do with the borrowed tokens? Can we see your inventory position daily?" If the answer is vague, the tokens may be used for purposes beyond market making, including lending, shorting, or collateralisation.

3. "Proprietary strategy" as a reason for no reporting

"Our trading strategy is proprietary. We can't share real-time data."

Every trading firm has proprietary elements. That doesn't mean they can't show you basic operational metrics. There's a clear line between protecting their algorithmic IP and refusing to show you whether they're actually quoting on your token.

You should expect, at minimum:

• Daily or real-time bid-ask spread data
• Order book depth metrics
• Volume attribution (market maker vs organic)
• Inventory position summaries

A firm that won't provide this is either doing something they don't want you to see or doesn't have the infrastructure to track it. Both are disqualifying.

4. No verifiable track record

"We work with 100+ tokens across major exchanges."

Ask for specifics. Which tokens? Which exchanges? Can you introduce me to three current clients? Can I verify your volume on any specific trading pair?

Firms with real track records are happy to provide references. They know their clients will confirm they deliver. Firms that deflect, cite NDAs for every client, or can't name a single verifiable engagement are either exaggerating or too new to have a track record.

NDAs are real and some clients do require confidentiality. But a firm with 100+ engagements that can't produce a single reference has a credibility problem.

Also verify independently. Check the order books they claim to make markets on. If they say they're the primary market maker for Token X on Exchange Y, look at that order book. Is there meaningful depth? Are the spreads tight? Is there consistent quoting? If the order book is thin and wide, the claim doesn't match reality.

5. Upfront token requests before terms are agreed

"Send us 500K tokens so we can start providing liquidity while we finalise the contract."

Never send tokens before a contract is signed. This should be obvious, but it happens. Firms pressure projects into "getting started quickly" by requesting token deposits before legal terms are agreed. Once tokens are transferred, your leverage in negotiations drops significantly.

The sequence is: agree on terms, sign the contract, then transfer tokens (if a loan is part of the arrangement). Any firm that tries to reverse this order is either poorly organised or deliberately trying to create leverage.

6. No discussion of risk management

You ask: "What happens during a major market downturn? How do you manage inventory risk?"

The answer is: "We've been doing this for years, we know how to handle it."

That's not an answer. Risk management is the most important operational capability a market maker has. It's what keeps them quoting when the market drops 30% in a day. It's what prevents them from accumulating a massive directional position that blows up and takes your market quality with it.

Specific things to ask:

• What are your maximum inventory limits?
• At what volatility level do you pull quotes?
• Do you use hedging? On which venues and instruments?
• What happened to your operations during the last major market crash?
• Have you ever had a risk event that affected a client's market? What happened and what changed?

A firm with real risk management will answer all of these in detail. They'll have specific numbers, specific procedures, and specific examples. A firm without will give you generalities.

7. Pressure to sign quickly

"This offer is available for 7 days. We're at capacity and can only take one more client this quarter."

Artificial urgency is a sales tactic, not a sign of quality. Good market makers are busy, but they don't use scarcity pressure to close deals. They let their track record and client references do the convincing.

Take the time you need to evaluate. Talk to references. Model the option costs. Have legal review the contract. A firm that pushes you to skip due diligence is not a firm you want managing your market.

What good proposals look like

For contrast, here's what a quality market maker proposal includes:

Clear scope. Which exchanges, which pairs, what depth targets, what spread targets, what uptime commitments. Specific numbers, not ranges or aspirations.

Transparent pricing. The full cost of the engagement laid out clearly. If there's an option component, the terms are explained with scenarios showing the cost at various token prices.

Reporting commitments. What you'll receive, how often, and in what format. Ideally a real-time dashboard with access from day one.

Performance targets. Measurable metrics that the market maker commits to. These should be in the contract, not in a side conversation.

Risk management framework. How they handle adverse conditions. Not a paragraph of reassurance but a specific operational framework.

References. Current or recent clients you can contact directly. Not just logos on a slide, but people you can call.

Reasonable terms. Fair duration, clean exit clauses, no hidden fees, no token requests before signing.

The market making industry in crypto has matured significantly. There are excellent firms operating with integrity and transparency. But the predatory operators still exist, and they've gotten better at packaging their proposals to look legitimate. The red flags above will help you tell them apart.

Your market maker handles one of your project's most critical infrastructure layers. The 2-3 weeks spent on proper due diligence will pay for itself many times over.