Market Making for Tokenized Securities: Obligations and Incentives

Market making — the continuous provision of two-sided quotes (bids and offers) that enables other participants to buy or sell immediately — is the critical liquidity mechanism that transforms security tokens from static ownership records into tradable financial instruments. As the STO market grew from $5.6 billion in 2024 issuance to $6.66 billion in 2025 and the broader RWA on-chain market reached $19.4 billion in early 2026 according to RWA.xyz, the demand for professional market-making services has intensified. In traditional equity markets, designated market makers and electronic liquidity providers maintain sub-penny spreads and absorb millions of dollars in order flow per second. In the security token market, market-making participation remains limited: only 12 firms actively provide liquidity across registered ATS platforms, maintaining average bid-ask spreads of 2.1% with median quote sizes of $5,000-$25,000. Understanding market maker obligations, incentive structures, and the unique economics of token liquidity provision is essential for issuers, ATS operators, and investors evaluating secondary market conditions.

Regulatory Framework for Market Making

Market makers in security tokens operate as SEC-registered broker-dealers and FINRA member firms, subject to the same regulatory obligations as traditional equity market makers. Key applicable rules:

FINRA Rule 5310 (Best Execution). While market makers themselves are not subject to best execution obligations when trading for their own account, they must comply with best execution when executing customer orders. Market makers that also act as agents for customer orders face heightened conflict-of-interest disclosure requirements.

Regulation SHO. Short selling rules apply to security tokens classified as equity securities. Market makers that short security tokens to provide liquidity must comply with locate requirements (Rule 203) and close-out requirements (Rule 204), adapted for blockchain-based settlement where T+0 atomic settlement reduces the practical significance of locate requirements.

Anti-Manipulation (Exchange Act Section 9(a)(2)). Market makers must not engage in transactions that create the appearance of active trading or artificially influence prices. In thin security token markets, where even modest order flow can move prices, this prohibition requires careful compliance — a market maker refreshing its own quotes can inadvertently generate a disproportionate share of visible order activity.

Form ATS-N Disclosure. ATS platforms that have affiliated market-making relationships must disclose these arrangements in Part II of Form ATS-N. tZERO and Securitize both disclose specific affiliated-entity market-making relationships in their ATS-N filings.

Market-Making Models for Security Tokens

Designated Market Maker (DMM) Programs

Several ATS platforms operate DMM programs that assign specific market makers to individual security tokens. Under these programs:

Obligations. The DMM commits to maintaining continuous two-sided quotes during trading hours, with maximum spread widths (typically 3-5% for security tokens vs. sub-penny for NYSE-listed equities) and minimum quote sizes ($2,500-$10,000 per side). The DMM must also maintain a minimum “time at the inside” — the percentage of trading hours during which the DMM’s quotes represent the best available bid and offer.

Incentives. In exchange for these obligations, DMMs receive: reduced or zero trading fees on the ATS platform, priority in the matching algorithm (DMM quotes are matched before other orders at the same price), issuer-funded liquidity rebates, and in some cases, equity or token-based compensation from the issuer.

Performance metrics. DMM performance is measured by: quoted spread (the width between bid and offer), effective spread (the actual cost of transacting), quote size (the dollar value of resting liquidity), time at the inside (presence of competitive quotes), and fill rate (the percentage of incoming orders that execute).

Algorithmic Market Making

Algorithmic market makers use automated trading systems to provide liquidity across multiple security tokens simultaneously. These systems:

Price discovery. Algorithms reference external data sources — comparable asset valuations, underlying property NAVs for real estate tokens, fund NAVs for tokenized fund interests — to establish fair value estimates and set quote prices around the estimated fair value.

Inventory management. Algorithms monitor accumulated inventory (net token positions acquired through market-making activity) and adjust quote prices to encourage flow that reduces inventory concentration. When the algorithm accumulates too many tokens, it widens the offer and tightens the bid to attract sellers; when it holds too few, it reverses the adjustment.

Risk management. Security token market makers face unique risks: smart contract vulnerability risk (a contract exploit could render custodied tokens valueless), blockchain network risk (network congestion or outage prevents trade execution), and regulatory risk (a change in Rule 144 interpretation or accredited investor definition could alter the eligible buyer pool overnight).

Issuer-Funded Liquidity Pools

Some token issuers establish liquidity pools — reserves of tokens and cash (or stablecoin) — that fund market-making activity during the critical early months of secondary market trading. Typical structures:

These pools are typically managed by an independent broker-dealer under a market-making agreement that specifies spread targets, minimum quote sizes, and reporting requirements. The issuer must disclose the existence of the liquidity pool in its offering documents to avoid misleading investors about organic secondary market demand.

Economics of Security Token Market Making

Market making profitability depends on the relationship between spread revenue and inventory risk:

Spread revenue. A market maker maintaining a 2% spread on a token with $50,000 daily volume earns approximately $1,000 per day in gross spread revenue (assuming it captures all trades). Across a portfolio of 10 tokens, this generates $10,000 daily or approximately $2.5 million annually — meaningful revenue for a specialized firm but insufficient to attract large-scale institutional market makers accustomed to billions in daily equity volume.

Inventory risk. Security tokens are illiquid, meaning a market maker that accumulates a large position cannot easily exit. If a real estate token drops 10% due to a property valuation write-down, the market maker’s inventory loss could exceed months of spread revenue. This risk-return profile limits market-making participation to firms with deep sector expertise and tolerance for illiquid positions.

Capital requirements. Market makers must maintain positions in their inventory, tying up capital in illiquid assets. SEC net capital rules require haircuts on security token positions — typically 15-25% — which increases the capital cost of maintaining market-making inventory.

T+0 settlement advantage. Blockchain-based atomic settlement provides a structural advantage for security token market makers: trades settle immediately, freeing capital for the next trade. In traditional markets, the T+1 settlement cycle ties up capital for a full business day. For active market makers, T+0 settlement can reduce capital requirements by 20-30%.

ATS Platform Market-Making Programs

tZERO. Operates a DMM program with fee rebates and priority matching for qualified market makers. Requires participants to maintain maximum 3% spreads and minimum $5,000 quote sizes during trading hours. Currently has 4 active DMMs across its listed security tokens. tZERO’s December 2025 expansion to near-24/7 trading (23.5 hours, 12:05 AM to 11:35 PM ET) creates new market-making challenges and opportunities, as DMMs must now provide liquidity across significantly extended hours. The January 2026 launch of Agora with North Capital — the first ATS-to-ATS connector — could aggregate liquidity across platforms, improving the economics for market makers on both venues.

Securitize Markets. Offers a market maker incentive program that eliminates trading fees for firms meeting minimum quoting obligations. Securitize’s integrated transfer agent and custody infrastructure simplifies onboarding for market makers, who can custody inventory within the Securitize ecosystem.

INX. Provides market maker access through dedicated API connectivity and reduced-fee schedules. INX’s token listing standards include a market-making assessment — evaluating whether the issuer has arranged for liquidity provision before approving the listing.

Compliance Considerations

Market makers in security tokens face compliance obligations beyond those in traditional equity markets:

Accredited investor verification. Market makers purchasing Reg D tokens on the secondary market must themselves be accredited investors (which all registered broker-dealers are), but must also verify that the tokens they sell are transferred only to verified accredited investors. This compliance check is typically enforced at the smart contract level through interoperability standards like ERC-3643.

Transfer restriction compliance. Market makers must verify that tokens they purchase are beyond their Rule 144 holding period before reselling. Smart contract-embedded holding period enforcement prevents premature transfers, but market makers must independently verify compliance rather than relying solely on smart contract validation.

Conflict management. Market makers that also serve as broker-dealers executing customer orders on the same ATS face potential conflicts between their market-making activities (trading for profit) and their agency obligations (acting in the customer’s best interest). FINRA Rule 3110 supervisory requirements mandate documented procedures for managing these conflicts.

Market-Making Economics

The economics of security token market-making differ from traditional equity markets. Wider bid-ask spreads (averaging 2.1% vs. 0.01% for large-cap equities) provide higher per-trade revenue, but lower trading volumes limit total revenue. Some ATS platforms offer incentive programs including reduced fees and co-marketing to attract professional market makers whose participation improves secondary market liquidity.

Market-Making Developments: 2025-2026

Several structural developments are reshaping the market-making landscape for tokenized securities:

Extended Trading Hours and Market-Making Obligations

tZERO’s December 2025 expansion to near-24/7 trading (23.5 hours per day, 12:05 AM to 11:35 PM ET) creates new challenges for market makers who previously provided liquidity only during standard business hours. DMM obligations on tZERO now require coverage across significantly extended sessions, increasing the capital requirements and staffing costs for continuous quote maintenance. Market makers must evaluate whether to maintain continuous human oversight, deploy fully automated algorithmic systems for overnight hours, or negotiate tiered obligation schedules with wider permitted spreads during off-peak hours. This extended-hours model may become the industry standard — the NYSE announced plans in early 2026 to build a 24/7 tokenized securities trading platform, which would further extend market-making obligations.

Cross-Platform Liquidity Aggregation

The January 2026 Agora ATS-to-ATS connector between tZERO and North Capital fundamentally changes the market-making calculus. Market makers can now access order flow from both platforms through a single connection, potentially doubling the effective trading volume available for each token. Cross-platform connectivity enables market makers to post quotes on one ATS and fill orders originating from the other, improving capital efficiency and reducing the per-token minimum viable volume threshold. If additional ATS-to-ATS connectors follow Agora’s model, the resulting liquidity network could attract institutional market makers who currently view individual security token venues as sub-scale.

Institutional Market Maker Entry

The institutional tokenization wave — led by BlackRock’s BUIDL fund ($1.87 billion AUM via Securitize), with additional institutional products from Apollo, Hamilton Lane, KKR, and Franklin Templeton — is attracting established institutional market-making firms to the security token space. The STO market’s growth from $5.6 billion in 2024 to $6.66 billion in 2025, with the broader RWA on-chain market reaching $19.4 billion, provides the volume trajectory that institutional market makers require to justify infrastructure investment. As these firms bring sophisticated algorithmic trading capabilities, risk management systems, and deeper capital bases, bid-ask spreads for institutional-grade security tokens are expected to tighten from the current 2.1% average toward levels closer to traditional alternative investments (0.5-1.0%).

DTC Integration and Market-Making Infrastructure

The December 11, 2025 SEC no-action letter allowing the DTC to operate tokenization services on permissionless blockchains could eventually integrate security token market-making with traditional DTCC settlement infrastructure. Market makers that currently maintain separate infrastructure for blockchain-based and traditional securities trading could consolidate onto unified platforms, reducing operational costs and enabling cross-asset hedging strategies. DTC-settled security tokens would also benefit from the established NSCC clearing guarantee, eliminating the counterparty risk that currently requires market makers to manage through bilateral settlement arrangements.

GENIUS Act and Settlement Efficiency

The GENIUS Act’s stablecoin framework, if enacted, would standardize the payment leg of DvP settlement for security token trades. Market makers currently manage platform-specific settlement arrangements — different stablecoin issuers, varying settlement finality guarantees, and inconsistent depegging risk profiles. A federal stablecoin framework would reduce this complexity, enabling market makers to standardize their settlement infrastructure across platforms. Standardized settlement reduces the capital buffers market makers must maintain for settlement risk, freeing capital for additional quote provision.

Crypto Task Force Market Structure Guidance

The SEC’s Crypto Task Force — through its six roundtables in 2025-2026 — has discussed market-making incentive structures for digital securities. The April 11, 2025 roundtable on crypto trading platform regulation addressed how FINRA’s market-making rules apply to extended-hours trading, cross-platform order routing, and algorithmic trading in thin digital securities markets. The Task Force’s engagement-first approach has created an opportunity for ATS operators and market makers to propose market structure improvements — including standardized DMM programs, cross-venue best execution protocols, and institutional market-making incentives — that could be adopted through staff guidance rather than formal rulemaking.

For our ATS platform comparison analyzing market-making programs across venues, see our comparisons section. For enforcement actions related to market manipulation in digital securities, see our tracker. For current trading volume and spread data, see our ATS market activity dashboard. For FINRA’s market-making guidance, see FINRA Rules on Market Making.