In the world of cryptocurrency, there are two types of investors: makers and takers. Makers are those who create liquidity in the market by placing limited orders on exchanges. Takers are those who take liquidity from the market by placing market orders. Makers typically earn fees by providing liquidity to the market, while takers typically pay fees for taking liquidity of the market.
Well, you’re about to find out! Keep reading to learn all about the difference between these two important terms.
Let us now discuss liquidity
Before we can adequately discuss makers and takers, we must first discuss liquidity. When someone says an asset is liquid or illiquid, they’re referring to how quickly it can be sold.
An ounce of gold is a relatively liquid asset since it can be quickly converted into cash. Unfortunately, a ten-meter-tall monument of Binance CEO riding a bull is an extremely illiquid asset. Though it would look fantastic in anyone’s front garden, not everyone would be interested in such a piece.
Market liquidity is a similar (though significantly distinct) concept. A liquid market is one in which you may quickly purchase and sell assets at a reasonable price. There is a high demand from those looking to acquire the asset and a high supply from those looking to sell it.
Given this level of activity, buyers and sellers tend to meet in the middle: the lowest sell order (or offer price) will be roughly equal to the highest buy order (or bid price). As a result, the spread between the highest bid and the lowest offer would be minimal (or tight). This discrepancy is known as the bid-ask spread.
An illiquid market, on the other hand, has none of these characteristics. Because there isn’t as much demand, it will be difficult to sell an asset at a fair price. As a result, illiquid markets can have a substantially wider bid-ask spread.
Okay! Now that we’ve discussed liquidity let’s move on to the makers and takers.
Market Makers vs Market Takers
As previously said, traders that flock to exchange either function as makers or takers.
An order book is frequently used by exchanges to calculate the market value of an asset. This is where it collects all of its users’ offers to purchase and sell. You could send an instruction that looks like this: Purchase 800 BTC for $4,000, for example. This has been placed in the order book and will be filled whenever the price reaches $4,000.
Maker (Post Only) An order like the one outlined requires you to indicate your intentions in advance by adding them to the order list. You’re a maker because you “created” the market in certain ways. The exchange is analogous to a supermarket shop charging customers to place things on the shelves, with you contributing your own inventory.
It is customary for large traders and institutions (such as those specializing in high-frequency trading) to act as market makers. Small traders can also become makers by placing certain order types that are not immediately executed.
Please keep in mind that putting a limit order does not guarantee that your order will be filled. If you want to ensure that your order is entered into the order list before it is filled, select “Post only” when placing your order (currently only available on the web version and desk version).
If we continue with the store example, you must be putting your inventory on the shelves for someone to buy. That individual is the taker. Instead of purchasing tins of beans from the supermarket, they are depleting the liquidity you give.
Consider this: by placing an offer on the order book, you boost the exchange’s liquidity by making it easier for users to buy or sell. A taker, on the other hand, removes some of that liquidity. With a market order – a purchase or sell instruction at the current market price
Existing orders on the book of orders are rapidly filled when they do this.
You’ve acted as a taker if you’ve ever placed a market order on Binance or another cryptocurrency exchange to trade. However, limited orders allow you to be a taker as well. The thing is, every time you fill someone else’s order, you are a taker.
Benefits of Market Makers and Takers
As previously stated, market makers and takers play an important role in maintaining asset liquidity. This is critical for maintaining an asset’s price stable or at least under control. If there is no liquidity, there is no means to acquire or sell an asset, which reduces the item’s value. Market makers and takers also serve, to some extent, to keep the asset free of market manipulation.
In short, What is the maker or taker Crypto?
Makers provide liquidity to exchange by “creating or making a market” for other traders. Takers eliminate liquidity by “taking” available orders that are instantly filled.
What Maker vs Taker Fees Mean for You
When a limit order on an exchange is not immediately filled, it increases liquidity to an order book for that security. Because the exchange is incentivized to recruit traders and varied orders to their platform, it may offer a maker charge that is lower than a taker fee to the market participant who is extending the order book. The market maker may be charged a fee for placing an order but may also be reimbursed for providing liquidity.
If a trade order is not immediately matched against an open order, the commission maker charge is paid. Investors can purposefully place limit orders that differ from the current price of a security to ensure they receive the transaction from the maker’s perspective. However, in exchange for a maker charge, the transaction is not settled quickly.
When a market order is placed, it is frequently executed immediately. This type of order depletes a security’s existing liquidity on an order book. Because this is undesirable for exchanges because the security’s liquidity has dropped, exchanges apply taker fees to discourage traders from canceling current pending orders. In most cases, the taker fee is more than the creator fee.
If a trade order is executed immediately and removes liquidity on the market, it receives the taker charge. Traders may prefer immediate order resolution and are willing to pay greater fees. If this is the case, the trader will instantly execute a market order.
Understanding Maker-Taker Fees Via GDAX
Maker fees are incurred if your order is not filled quickly, such as if you set a limit order. Meanwhile, taker costs are assessed when an order is filled immediately.
When trading on exchanges with higher taker fees, you should always try to pay maker fees wherever possible.
Setting limit orders is required to pay maker fees. Limit orders help to shape the market and provide something for others to take.
Maker: An order is placed on the order book when it is not instantly matched by an existing order (for example, a limit order that takes a few hours or days to fill). You are regarded as the manufacturer once that order sells or buys. That is when another consumer places an order that matches yours. Your GDAX commission will be 0%.
Taker: When you place an order at the market price that is promptly filled, you are termed a taker and will be charged a fee (for GDAX, that is 0.10 percent and 0.25 percent for BTC books and 0.10 percent and 0.30 percent for ETH books depending on your volume; the more you trade, the lower your fee is over time).
If an order is partially filled immediately, you must pay a taker fee for that half. The remainder of the order is placed in the order book and is deemed a maker order if it is matched
An Added Incentive
The maker-taker strategy dates back to 1997 when Island Electronic Communications Network founder Joshua Levine devised a pricing scheme to incentivize providers to trade in marketplaces with small spreads. Makers would receive a $0.002 per share rebate in this scenario, takers would pay a $0.003 per share fee, and the exchange would keep the difference. By the mid-2000s, rebate capture tactics had become a standard part of market incentives, with rewards ranging from 20 to 30 cents per 100 shares traded.
Maker-taker pricing schemes are used by exchanges such as NYSE Euronext’s Arca Options platform, Nasdaq Inc.’s NOM platform, and BATS Global Markets’ US options exchange.
The customer priority system is used by both International Securities Exchange Holdings, Inc. and the Cboe Options Exchange, which is controlled by Cboe Holdings, Inc.
Possible Pricing Distortions
Detractors of the technique argue that the rebates and other concessions make publicly available bid/offer prices in the market misleading. Some critics argue that high-frequency traders take advantage of rebates by purchasing and selling shares at the same price in order to profit from the spread between rebates, which obscures the true price discovery of assets. Others argue that maker-taker payments create fake liquidity by luring people who are just interested in the rebates and do not move shares significantly.
One study conducted by University of Notre Dame finance professors Shane Corwin and Robert Battalio, as well as Indiana University professor Robert Jennings, discovered stockbrokers who routinely routed customer orders to markets with the best payouts. Their research discovered that when stockbrokers routed trades to maximize rebate gains, order execution quality decreased.
A Closer Regulatory Look
Jeffrey Sprecher, CEO of Intercontinental Exchange (ICE) Group, Inc., which runs the New York Stock Exchange, called for regulators to investigate rebate pricing practices in January 2014.
The Royal Bank of Canada’s capital markets group said in a letter to the Securities and Exchange Commission (SEC) that maker-taker agreements promoted conflicts of interest and should be prohibited.
Following the uproar, Senator Charles Schumer (D-NY) urged that the SEC investigate the matter.
Former SEC Commissioner Luis Aguilar revealed in an October 2015 speech that the SEC is considering a pilot scheme to reduce maker-taker rebates. This pilot initiative would eliminate crypto maker-taker fees in a small group of equities for a trial period in order to demonstrate how trading in those securities compares to comparable stocks that still use the maker-taker payment system.
However, in 2020, the United States Court of Appeals found that this investigation exceeded the SEC’s power, and the pilot program was canceled.
How Do I Avoid Maker-Taker Fees?
Limit orders at a trigger price are used to build out an order book, which reduces taker fees and maker fees. Market makers may be compensated for building a platform’s liquidity rather than being taxed for taking liquidity via market orders.
What Is an Example of Maker-Taker Fees?
In the early days of maker fee vs taker fee, a market taker was charged $0.003 per share and sellers who helped complete the order were reimbursed $0.002 per share. The buyer pays to have their order filled, while investors who are waiting for their limit orders to fill are paid.
Do I pay both the maker and taker fees?
Market makers are those who provide two-sided markets, and takers are those who trade the prices set by market makers. Takers who place market orders must pay taker fees, whereas makers who place limit orders may be compensated for satisfying orders.
There is no definitive answer to this question as it depends on personal preferences and trading strategies. Some traders prefer maker orders because they believe it provides more liquidity to the market, while others prefer taker orders because they feel it provides better price discovery. Ultimately, it is up to the individual trader to decide which type of order is best for them.
Covemarkets hopes this article will be helpful for you. Thank you for taking the time to read
Disclaimer: The information provided in this article is not investment advice from Cove Markets. Cryptocurrency investment activities are yet to be recognized and protected by the laws in some countries. Cryptocurrencies always contain financial risks.