Always falling after buying and being targeted by the market maker? From the market maker quoting mechanism, see why small coins always go against you

Retail investors often experience price reversals after buying cryptocurrencies. This is not targeted manipulation but rather the market maker adjusting quotes and spreads based on models to respond to inventory risk and trading flow changes, not market manipulation.

Many crypto investors have had similar experiences: a seemingly breakout altcoin, entering to buy, only for the price to immediately reverse downward, as if the market is “specifically targeting your trades.” This situation is especially common with smaller coins, leading to the saying “being targeted by market makers.”

But is this really the case? In fact, price reversals are not necessarily subjective manipulation but stem from market makers’ risk management behaviors under specific models.

The Hong Kong University of Science and Technology Crypto Club President Dave recently posted a lengthy article on X (account: @bc1qDave), systematically analyzing this long-standing market phenomenon that troubles retail investors from the perspective of market microstructure and quantitative models.

In the article, Dave points out that these price reversals are mostly not the so-called “market makers targeting retail investors” or subjective manipulation but originate from market makers’ automated quote adjustments under the Avellaneda–Stoikov market-making model, based on inventory risk and toxic order flow. In other words, retail trading itself often changes the market’s risk pricing.

Market Makers Are Not Betting on Direction, But Managing Risk

Unlike typical investors, market makers do not profit from predicting price movements but earn stable income through bid-ask spreads and spreads. Ideally, market makers keep their inventories near neutral, minimizing the impact of price fluctuations on overall PnL.

However, when the market experiences large active buy or sell orders, this balance is disrupted.

• You buy heavily
• Equivalent to market makers selling heavily
• Market maker inventory becomes “short exposure”

At this point, inventory itself becomes a source of risk.

Mechanism 1｜Quote Skew: Why Do Prices Move in the Opposite Direction?

When market makers take on excessive short positions due to retail investors’ large buy orders, they have two core goals:

• Quickly replenish inventory
• Protect existing short positions from adverse price movements

Therefore, market makers will proactively lower their quotes to attract sell orders and suppress further buy orders. To investors, this behavior appears as “I buy, and the price drops.”

In reality, this is not targeted at individuals but the result of automatic quote adjustments by the system.

Mechanism 2｜Widening Spreads: Why Trading Becomes Difficult

If inventory imbalance worsens further, market makers will also:

• Widen bid-ask spreads
• Reduce trading frequency

The purpose is to lower the risk undertaken per unit time and offset potential price losses through higher spreads.

Core Concept Behind the Math: Reservation Price

In the market-making model, the actual transaction price for retail traders is called the Reservation Price, simplified as:

Reservation Price = Mid-price − γ × q

• q: Market maker’s current inventory
• γ (gamma): Risk aversion coefficient

When retail traders place concentrated orders, causing rapid inventory changes, the Reservation Price adjusts accordingly, influencing market quotes.

According to the Avellaneda–Stoikov model:

• Optimal quotes revolve around the Reservation Price
• Inventory exhibits mean-reversion characteristics
• Spreads widen as risk increases

Simply put: your trading flow changes the market’s risk pricing.

Why Are Retail Investors Particularly Prone to “Water Reversal”?

Compared to institutional and professional traders, retail investors often have the following characteristics:

• Almost all active orders
• Concentrated order sizes
• Unhidden pacing, no order splitting
• No hedging mechanisms

In highly liquid mainstream coins, these effects may be offset by other trading pairs; but in small altcoins, your orders often become the primary market signals in a short period.

In other words, in small coin markets, you are very likely to directly become the counterparty to market makers.

What Is the True Objective Function of Market Makers?

Rather than aiming to “blow up retail investors,” market makers pursue the maximization of:

Spread revenue − Inventory risk − Adverse selection risk

Among these, inventory risk is often incorporated as an “exponential penalty,” which explains why quote adjustments are so swift and decisive.

Practical Tips for Retail Investors: Reverse Use of Quote Mechanisms

Once you understand the logic behind market makers’ quotes, you can also leverage it slightly.

For example, if you want to establish a 1000 $USDT long position:

• Do not buy all at once
• Start with a small amount, e.g., 100 USDT
• Wait for the quote system to lower prices before gradually adding to your position

By entering in batches, your average cost basis is often lower than going all-in at once.

To Be Continued｜Toxic Order Flow Is the Other Half of the Truth

This article only reveals one reason for price divergence — the inventory-driven quote mechanism. Another key factor is how market makers identify and defend against “toxic order flow.”

In the next article, Dave will delve into:

• How market makers analyze order books

• What types of trades are considered “toxic”

• The microstructure causes of certain extreme market events

• This article is reprinted with permission from：《Chain News》

• Original title: 《Why does buying a shanzhai coin cause it to drop? Unveiling the market maker quote mechanism, it’s not “market maker targeting you”》

• Original author: Elponcho