ResearchMarch 2026~10 min read
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.
Key distinction
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.
2. What Kills the Bid
The first risk is adverse selection. An informed seller dumps a position before bad news hits. The MM buys at the bid, not knowing the news. The news breaks. The price drops. The MM holds depreciating inventory with no buyer in sight.
The second risk is inventory decay. Even without adverse selection, if the MM buys at $10 and no buyer shows up for weeks, the position erodes. Interest rate moves, credit deterioration, or simple time decay on illiquid assets can turn a reasonable purchase into a loss.
The third risk is the quietest. When volume dries up, the MM does not announce its departure. It performs a soft exit: widening to stub quotes. A bid of $0.01 and an offer of $999. Technically, it is fulfilling its exchange obligation to post two sided quotes. Practically, it is not trading.
Volume vs spread behavior
MM Behavior
Tight spread, high turnover
Moderate Volume / Falling
MM Behavior
Growing spread, MMs fading quotes
MM Behavior
Wide spread, warehousing risk
| Volume | Trend | MM Behavior |
|---|
| Healthy | Tight spread, high turnover |
| Falling | Growing spread, MMs fading quotes |
| Ghost Town | Wide spread, warehousing risk |
The metric that matters is not a volume percentage. It is inventory half life: how long it takes the MM to turn over half of its accumulated position. Empirical data from NYSE specialists shows inventory half lives of roughly one trading day under normal conditions. For illiquid stocks, that stretches to weeks. The longer the hold, the wider the spread has to be to compensate.
When a market maker cannot turn over its full inventory position within a single trading session (roughly 6.5 hours for US equities), it carries overnight risk and the economics change. The position is no longer a temporary bridge between buyers and sellers. It is an unhedged bet.
When does a market maker stop making money?
Inventory half life under 1 day. The MM flips positions fast. Spreads stay tight. The business works.
Half life of days to weeks. Inventory accumulates. Spreads widen to compensate for holding risk. Quotes thin out.
Half life of weeks or more. The MM is no longer market making. It is warehousing risk. Stub quotes replace real bids.
Academic research frames the same problem differently through a measure called PIN, the probability of informed trading. PIN estimates what fraction of trades come from participants with a private information advantage. When PIN exceeds roughly 30 to 40%, the cost of trading against informed counterparties exceeds the spread revenue earned from uninformed flow.
At that threshold, the realized spread (the actual profit per trade, measured after accounting for how much the price moves against the MM post execution) turns negative. The market maker loses money on average, on every trade. No business survives that.
3. Why Listed Wrappers Work
BDCs, CEFs (closed end funds), and mREITs (mortgage real estate investment trusts) trade on public exchanges. Anyone with a brokerage account can buy a share. No accreditation check. No minimum investment beyond the share price. No platform specific onboarding.
That open access is what keeps the bid tight. But access alone is not enough. Retail shows up because the structural rules make the product trustworthy enough to hold.
Structural protections that bring retail to the table
Leverage caps
Prevent managers from taking outsized levered bets with investor capital.
Mandatory distributions
Force cash back to shareholders rather than letting managers reinvest indefinitely.
Independent valuation
A third party checks the marks. The issuer does not grade its own homework.
Public disclosure
SEC filings (10-K, 10-Q, 8-K) mean investors can see what they own and how it is performing.
Without those protections, retail stays out. Without retail, the MM has no one to flip to. The bid disappears.
Our companion paper, “When Illiquid Assets Trade,” covers this in detail. Listed wrappers hold the same loans and mortgages as tokenized products but trade daily with real volume because structural constraints create an environment where retail is willing to participate.
4. The Tokenized RWA Trap
Most tokenized real world assets (RWAs) are offered under Regulation D, which limits participation to accredited investors: individuals with a net worth exceeding $1M (excluding primary residence) or income above $200K annually.
This is not a minor regulatory detail. It is the structural feature that determines whether a liquid market can exist.
Accredited investors are, almost by definition, informed traders. They have access to research, relationships with issuers, and the sophistication to analyze credit risk. In a pool of exclusively accredited participants, the probability of any given trade being informed is well above the 30 to 40% threshold where market makers start losing money. It may approach 100%.
If the MM is only trading against accredited counterparties, adverse selection is not an occasional hazard. It is the default condition. Every trade is suspect.
There are no uninformed traders to offset the informed flow. No velocity from a broad base of participants buying and selling for portfolio rebalancing, income, or simple allocation changes. No inventory flip. The MM buys, holds, and hopes.
Public asset wrappers vs tokenized RWAs
Accreditation Required
Public Asset
No. Anyone with a brokerage account.
Tokenized RWA
Yes. Reg D limits to accredited investors.
Reporting Standard
Public Asset
SEC filings (10-K, 10-Q, 8-K). Audited financials.
Tokenized RWA
Varies. Often limited to investor updates.
Where to Buy
Public Asset
NYSE, NASDAQ. Any retail broker.
Tokenized RWA
Platform specific. Often requires onboarding and KYC per issuer.
Volume Type
Public Asset
Mixed retail and institutional. High uninformed flow.
Tokenized RWA
Almost entirely institutional or accredited. Informed flow dominant.
MM Behavior
Public Asset
Continuous two sided quotes. Tight spreads in liquid names.
Tokenized RWA
No natural MM incentive. Hired liquidity providers act as buyers of last resort.
| Dimension | Public Asset | Tokenized RWA |
|---|
| Accreditation Required | No. Anyone with a brokerage account. | Yes. Reg D limits to accredited investors. |
| Reporting Standard | SEC filings (10-K, 10-Q, 8-K). Audited financials. | Varies. Often limited to investor updates. |
| Where to Buy | NYSE, NASDAQ. Any retail broker. | Platform specific. Often requires onboarding and KYC per issuer. |
| Volume Type | Mixed retail and institutional. High uninformed flow. | Almost entirely institutional or accredited. Informed flow dominant. |
| MM Behavior | Continuous two sided quotes. Tight spreads in liquid names. | No natural MM incentive. Hired liquidity providers act as buyers of last resort. |
Some RWA projects address this by hiring liquidity providers to post standing bids. These firms absorb sell pressure when someone wants out. But in the absence of organic buyers on the other side, the liquidity provider accumulates inventory with limited options for exit beyond redeeming with the issuer.
This changes the nature of the role. A traditional market maker is direction neutral, earning the spread by flipping between buyers and sellers. When there is no retail flow to flip against, the liquidity provider ends up carrying directional exposure: long the asset, waiting for the issuer to redeem at par. The economics look more like a fund holding discounted assets than a market making operation.
Without retail flow, the economics of market making shift. The liquidity provider is no longer flipping inventory. It is accumulating assets at a discount and holding them, which is closer to a fund thesis than a market making operation.
5. What Would Need to Change
For retail to participate in tokenized illiquid assets, they would need the same protections that make public markets work. Independent valuation that does not rely on the issuer marking its own book. Enforceable constraints on leverage and manager behavior. Transparent data on holdings and performance. A bid that does not disappear when markets get rough.
On chain infrastructure can deliver some of these. Observable state means anyone can verify holdings and positions without waiting for quarterly filings. Smart contracts can cap leverage, trigger distributions, and restrict manager actions programmatically. Validator networks can provide independent pricing from multiple parties rather than a single appointed valuation agent.
Regulatory paths to retail access
Reg D (current default)
Accredited investors only. Fast to launch. No retail. No liquidity.
Reg A+
Open to all investors. Raise capped at $75M. Ongoing reporting requirements. Some retail access, limited scale.
Full SEC registration
Widest access. Requires audited financials, continuous disclosure, and significant compliance cost. This is how BDCs and mREITs do it.
The access question is a regulatory problem, not a technology problem. Technology can solve trust. Access requires regulatory change, or a willingness to bear the cost of full registration.
Until one of those paths opens up, the inventory half life for tokenized RWAs will remain measured in weeks or months. Nearly every trade will come from an informed counterparty. And the bid, where it exists, will reflect the economics of a liquidity provider carrying directional risk rather than a competitive market. For a closer look at the structural characteristics that attract retail participation to listed products holding the same underlying assets, see When Illiquid Assets Trade.