The Yin & Yang of Market Makers & Market Takers
Maker fees and Taker fees. What are they?
Cryptocurrency trading requires investment. To trade as effectively as possible and to select the right trades, it is imperative for traders to know about the common types of trading fees cryptocurrency exchanges charge for orders.
When calculating fees on a cryptocurrency exchange, orders are classified into two categories: those charged with “maker fees” and those charged with “taker fees”.
Who does the Maker fees affect?
Adding liquidity to an order book until it is picked up by another trader helps to “make the market ”.
On an exchange, limit orders are usually not filled immediately. The exchange only triggers when the price of an asset like Bitcoin rises or falls.
Traders who place orders like this "make liquidity in a market" for other traders. In placing this order, the trader adds liquidity to the order book and, as a result, the trader is referred to as a "maker" for providing new options to other traders.
A maker order must be higher in price than the highest buy order, or the trader must place a buy order lower in price than the lowest sell order in order to qualify.
A maker's fee for an order is usually lower than another maker's fee. To generate liquidity, exchanges need to attract traders to their platforms. Based on the number of active traders and overall volume of trading on an exchange, liquidity indicates the extent of market interest. In this way, it is incentivised to create a market by lowering maker fees.
As a maker, one disadvantage is that it may take longer for them to fill their orders, namely until the market triggers the set limit price.
We can use the analogy that makers keep traders flowing while also assisting an exchange's growth, and "takers", who work in symbiotic partnership with makers.
Who does the Taker fees affect?
Takers, on the other hand, are traders who look for trading options they can fill immediately. An option like this would be a market order, which is based on immediacy. The taker places buy orders or sell orders in an order book and pays taker fees when the orders are filled.
Assume a trader buys 1 Bitcoin (BTC) and fills a market order.
Market orders always fill immediately. Whenever a market order is too large and there is not enough liquidity in the order book, it will be rejected. As a result, if there is insufficient liquidity in the order book to fill 1 BTC, the market order will be rejected.
No matter what the current price of an asset is, market orders are available. As a result, our taker buys the 1 BTC almost instantly and pays a slightly higher taker fee for the convenience and fast execution that the exchange and makers provide.
The most common orders in order books are limit orders and stop limit orders, which remain in the order book for a long time. Every filled order has a maker and a taker. If you place a limit order with the same price as what is currently in the order book, you will be filled as a taker.
Maker-taker orders.
An order can both have a maker and a taker fee. Trader A wants to buy 1 BTC for EUR 10,000, so he places a buy limit order in the order book and hopes that the price drops to EUR 10,000 so that his order can be filled. Trader B wants to sell 2 BTC now. A sell limit order is also placed by trader B to sell 2 BTC at EUR 10,000.
The order placed by Trader B will instantly match the order placed by Trader A. For the 1 BTC that Trader B sold, Trader A will pay a maker fee, but Trader B will pay a taker fee. As only one of the two BTC has been sold, Trader B's order is now only 50% filled and remains this way in the order book. After Trader C buys the 50% of BTC of that order, Trader B will pay a maker fee for the remaining BTC he sold.
Conclusion.
Finally, “makers” and “takers” must be distinguished from the term “market makers”. By holding a large number of assets that can be bought or sold at very short notice, market makers ensure that liquidity is maintained in a market to ensure efficiency in trading.
Any cryptocurrency exchange is interested in traders creating liquidity and trading volume on its platform. Traders are therefore incentivized accordingly by exchanges.
In short:
- A maker creates liquidity for other traders by creating a market
- Takers remove liquidity by filling immediate orders
- To incentivise market makers, taker fees are usually slightly higher than maker fees
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