Market maker

AMMs use a formula instead of an order book for trading

Automated market makers (AMMs) replace traditional order books with algorithms that determine prices based on a mathematical formula. This formula typically involves the balance of supply and demand for a given asset, allowing for continuous trading without the need for a centralized order book.

Example

In a decentralized exchange like Uniswap, the price of a token is determined by the constant product formula, which ensures that the product of the quantities of the two tokens in the liquidity pool remains constant.

AMMs simplify trading processes and enable continuous liquidity provision in decentralized markets.

Related concepts

the Capital Asset Pricing Model (CAPM) says

CAPM formula: Expected return = Rf + β(Rm - Rf)

Arbitrage pricing theory

APT uses multiple systematic risk factors; CAPM uses a single market index

High-frequency trading

HFT firms move in and out of positions in seconds or fractions of a second

Beta (finance)

Beta measures a stock's volatility relative to the market

Binomial options pricing model

Binomial options pricing model (BOPM) is a numerical method for option valuation

Order (exchange)

Limit orders set a price; market orders execute immediately

Educational content, not financial advice.

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