In the cryptocurrency market or the stock market, you may be familiar with the terms market maker and market taker. They are important players in the trading process, so every investor should know these basics. How does the market maker’s vs. market taker’s problem relate to crypto investors?
What is maker vs taker?
Market makers and market makers work together to create a well-functioning trading market. A market maker is a person who creates a buy or sell order for execution, while a taker is a party who immediately buys or executes that order. The actions of market makers and takers are described in the order book. The market needs to have enough liquidity to fulfil buy and sell orders, and that's what market makers and takers do. Without liquidity, you will not have enough assets available to meet the trading needs of market participants.
How do makers earn profit?
Market makers are compensated for the risk of holding assets because they may see the value of a security decrease after it is purchased from the seller and before it is sold to the buyer.
As such, they typically charge the aforementioned spreads for every security they cover. For example, when an investor searches for a stock using an online brokerage firm, it might observe a bid price of $100 and an asking price of $100.05. This means that the broker buys the stock for $100 and then sells it to a potential buyer for $100.05. With high-volume trades, a small spread can add substantial daily profits.
What are maker fees and taker fees?
Exchanges and some high-frequency traders are coming under scrutiny by regulators for rebate pricing systems they say distort pricing, reduce liquidity and cost long-term investors. So-called maker-taker fees provide liquidity providers with trading rebates.
Maker Fees
When a limit order is placed on an exchange that is not immediately filled, the order adds liquidity to the order book for that security. Since exchanges are incentivized to attract traders and various orders to their platforms, exchanges may reward market participants with extended order books that are lower than taker fees. Market makers may be charged fees for placing orders, but may also receive trading rebates for providing liquidity. If the trade is not immediately matched with an open order, the trade order is subject to a pending order fee. Investors can intentionally place limit orders that differ from the security's current price to ensure they receive trades from the maker's perspective. However, in exchange for maker fees, settlement of the transaction does not happen immediately.
Taker Fees
Once a market order is placed, it is usually executed immediately. This type of order removes some of the existing liquidity on the securities order book. This is bad for exchanges as the liquidity of the securities drops, so exchanges charge taker fees to prevent trades from removing existing pending orders. The amount of the taker fee is usually greater than the amount of the maker fee. Trade orders will receive a taker fee if the fee is executed immediately and liquidity is drawn from the market. Traders may prefer immediate settlement of their orders and are willing to pay higher fees. If this is the case, the trader will use a market order to execute immediately.
We hope you’ve understood what maker vs taker is, maker fees, and taker fees through this article. This model is important for understanding how liquidity and trading work and how prices are affected. Most markets operate in this model, as do other asset classes, so it's well worth knowing.
