Retainer Model Market Making
A retainer model market making deal pays the market making firm a fixed fee per period, usually monthly, to meet defined quoting obligations. The issuer keeps its tokens and grants no options, so the firm's compensation is tied to the service rather than to the token price.
TradFi parallel: Like paying a broker a flat monthly fee for a service rather than compensating them with equity in your company.
Key Takeaways
- 01The firm is paid a fixed periodic fee, and grants of tokens or options are not part of the compensation
- 02Cash cost is the trade off for a cleaner incentive relationship between issuer and firm
- 03Underperformance becomes a service failure rather than a dispute about misaligned incentives
- 04Terms and exits are usually simpler than loan and option deals because there is no option package to unwind
- 05Retainers suit teams with treasury runway or tokens with existing organic volume, and are hardest to fund immediately after listing
How It Works
Under a retainer the issuer pays cash and, in most arrangements, still provides working inventory or funds a trading account so the firm has something to quote with. The distinguishing feature is not the absence of inventory, it is the absence of an option package. The firm's return is the fee, so its economic interest in the token price is far smaller than under a loan and call option structure.
The practical trade off is cash against alignment. A retainer costs treasury every month, which is exactly why early stage teams avoid it. In exchange, the issuer gets a cleaner relationship: the firm is paid to quote, quoting is the whole of the deal, and underperformance is a service failure rather than a dispute about incentives. Retainers also tend to come with shorter terms and simpler exits, because there is no option package to unwind.
Retainers are most defensible when the issuer has treasury runway, when the token has enough organic volume that liquidity support is maintenance rather than creation, or when a previous loan and option arrangement produced a misalignment the team does not want to repeat. They are hardest to justify pre listing or immediately after, when cash is scarce and the liquidity need is largest. Many teams end up in hybrid arrangements for exactly that reason.
Real World Examples
Retainer with no inventory arrangement
An issuer agrees a monthly fee but never settles who funds the inventory being quoted. The firm quotes thinly and points to the absence of working capital. A retainer covers the service, so the agreement still has to say separately what is being quoted with and who supplies it.
Switching to a retainer after a loan arrangement
A team ends a loan and option deal and moves to a retainer to remove option overhang. The unwind and the new arrangement need to overlap, because the old inventory leaving the book and the new arrangement starting are not automatically simultaneous.
Retainer priced without reference to obligations
Two quotes for the same monthly fee can describe very different obligations: different venue counts, spread targets and uptime commitments. Comparing fees without normalising the obligations behind them compares nothing useful.
Frequently Asked Questions
Is a retainer more expensive than a loan and call option deal?
In cash terms almost always yes, because a loan and option deal has no cash cost at all. In total economic terms the comparison is harder, since the value transferred through an option package depends on how the token performs. A retainer has a known cost, an option package has a variable one.
Does a retainer mean the issuer keeps all its tokens?
It means no options are granted over them. Most retainer arrangements still require inventory or a funded trading account, because a firm cannot quote a two sided book with nothing on it. The agreement should state clearly who supplies that inventory and what happens to it at termination.
When does a retainer make the most sense?
When the treasury can fund it and the token already has organic volume, so the firm is maintaining a market rather than creating one. It also makes sense for teams that have run a loan and option arrangement and want the firm's compensation tied to the service instead.
Can retainer fees be tied to performance?
Yes, and this is where retainers are strongest. Because the fee is the compensation, it can be reduced when measurable obligations are missed. That mechanism is much harder to build into a structure where most of the firm's return sits in an option package.
Related Terms
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