Who Provides the Bid
Billions of dollars in tokenized real world assets sit on platforms where the best bid is either absent or so wide it is not economically viable to trade against. The reason is not technology. It is that the participant base is too narrow and too informed for traditional market making economics to work.
1. How Market Makers Actually Work
A market maker (MM) posts two prices: a bid, the price it will buy at, and an offer, the price it will sell at. The gap between them is the spread. The spread is how the MM makes money: buy at the bid, sell at the offer, pocket the difference. But the spread only becomes profit if the MM can complete the flip. If it buys and cannot sell, the spread is just compensation for holding risk.
The actual profit comes from turnover. Buy at the bid, sell at the offer, repeat. The faster the flip, the less time the MM holds risk.
For that flip to work, the MM needs balanced flow: roughly equal buying and selling pressure from counterparties who are not trading on private information. This is called uninformed flow.
Uninformed does not mean unintelligent. A retail investor buying shares of a BDC (business development company) because the yield looks attractive is making a considered decision. The trade is “uninformed” only in that it is not based on private knowledge, like an undisclosed loan default that will crater the fund's NAV (net asset value) next quarter.
Informed flow comes from participants who do have an edge: a hedge fund that knows a borrower is about to miss a payment, a credit analyst with early delinquency data, an insider selling ahead of bad earnings.
When the MM trades against informed flow, it loses. The informed seller dumps inventory the MM buys at $10, and by the time the MM tries to sell, the price has moved to $8. This is adverse selection: the people most eager to trade are the ones most likely to be right about direction.
The industry calls this toxic flow. Every incoming order gets categorized, implicitly or explicitly, by whether it is likely to cost the MM money. Retail orders from a discount brokerage are almost never toxic. A block sell from a credit fund with a track record of being right almost always is.
The MM's business model depends on having enough uninformed flow to absorb the losses from informed flow. When the ratio tips too far toward informed traders, the MM widens the spread, reduces size, or walks away.