Market makers pull back from smaller venues, widening spreads outside the top exchanges

Several proprietary trading firms have reduced or withdrawn quoting commitments on mid-sized exchanges this year, concentrating inventory on the venues where they can recycle risk fastest.

The driver is the cost of pre-funding. Because most crypto venues require assets to sit on the platform before trading, every additional order book a firm supports ties up capital that cannot be netted against positions elsewhere.

The visible result is a widening gap in quoted depth. On the largest books, the cost of executing a mid-sized order has barely moved; on smaller platforms, the same order now walks further up the ladder.

Exchanges have responded with rebate programmes and, in a few cases, direct liquidity agreements that pay a fixed fee for quoting obligations rather than relying on volume tiers.

Off-exchange settlement networks, which let firms trade on a venue while collateral remains with a third-party custodian, are the structural answer most desks point to. Adoption has been slow because it requires the exchange, the custodian and the trading firm to agree on default handling.

For retail users, the effect is mostly invisible at small sizes. For funds executing in size, venue selection has become as consequential as timing.