Understanding Basis Points: Measuring Spreads in Crypto Market Making

What Are Basis Points?

In the world of crypto trading and market making, precision matters. One of the most commonly used units to measure small price differences is the basis point, often abbreviated as "bps." But what exactly is a basis point, and why is it so important for market makers?

A basis point is equal to 1/100th of a percent, or 0.01%. In decimal form, that's 0.0001. This unit is especially useful when discussing small changes in price, interest rates, or spreads—areas where percentages alone can be too coarse.

Examples:

• 1 basis point (1 bps) = 0.01%
• 10 basis points (10 bps) = 0.10%
• 100 basis points (100 bps) = 1.00%

Why Use Basis Points in Crypto Market Making?

Crypto markets are highly competitive and often volatile. Market makers—entities or bots that provide liquidity by posting both buy (bid) and sell (ask) limit orders—need to define their pricing strategies with precision. Spreads, or the gap between bid and ask prices, are typically measured in basis points because:

• Fine granularity: Bps allow for very small adjustments, which is crucial in liquid markets where tight spreads are common.
• Consistency: Using bps standardizes spread measurement across different price levels and assets, making it easier to compare strategies.
• Risk management: Small changes in spread can significantly impact trading frequency and inventory risk, so precise measurement is key.

How Spreads Are Defined Using Basis Points

The spread is the difference between the best bid and best ask prices. In market making, the spread is often set as a range in basis points around a reference (base) price.

For example, if the base price of a token is $100 and the spread is set to 50 bps (0.50%), the bot might place:

• Bid orders at $99.75 (0.25% below the base price)
• Ask orders at $100.25 (0.25% above the base price)

The total spread between bid and ask is 50 bps, or 0.50% of the base price.

Table: Spread Examples at Different Basis Points

Basis Points in Atlas LP's Market Making Bot

Atlas LP is a multi-tenant software platform that runs a spot liquidity (market making) bot on your own centralized exchange account via your API key. When configuring the Basic strategy in Atlas LP, spreads are defined in basis points:

• Spread min/max (bps): Set the minimum and maximum spread width for your orders. The width must be at least 40 bps.
• Nested bands: You can set different spread bands for day and hour periods, allowing for dynamic adjustments.
• Level spacing: The distance between each bid or ask level can be set from as little as 0.1 bps, giving you granular control over your order ladder.

This level of precision helps you tailor your liquidity provision to the needs of each market and asset, while maintaining compliance with exchange rules and avoiding excessive overlap with your own orders.

Why Spreads Matter for Market Makers

The spread you choose directly affects your trading activity and risk profile:

• Tighter spreads (lower bps): Attract more trades but may increase inventory risk and exposure to adverse price movement.
• Wider spreads (higher bps): Reduce trading frequency but can provide more buffer against volatility.

Finding the right balance is a core challenge for every market maker. Basis points provide the standardized language to make these decisions and compare results.

Genuine Market Making vs. Manipulation

Genuine market making means placing resting limit orders that any participant in the market can trade against. This helps create a fair and liquid market. Practices such as wash trading, self-trading, or volume manipulation are prohibited and do not constitute legitimate market making. Atlas LP is designed to support compliant, transparent liquidity provision using only limit orders on spot markets.

How to Monitor and Adjust Spreads

Atlas LP provides a console where you can view your open orders, recent fills (including fees), balances, and bot events. You can adjust your spread settings and order sizes, and monitor how your chosen basis point spreads are performing over time. Telegram alerts can notify you if your bot has had no fills for a chosen number of minutes, helping you stay on top of market conditions.

Summary

Basis points are a fundamental unit for measuring and managing spreads in crypto market making. They offer the precision and consistency needed to fine-tune liquidity strategies and adapt to changing market conditions. By understanding and applying bps-based spreads, market makers can better serve trading communities while managing their own risk.

Learn more about market making and how Atlas LP supports compliant liquidity provision on the market making page.

Atlas LP does not guarantee returns, prices, volume or listings.