What is a market maker or a market taker?
If you are new to cryptocurrency trading, you will likely have either been a market maker or a market taker without knowing. This applies to both buyers and sellers. Before defining a market maker or market taker, let’s look at liquidity and major types of orders on a cryptocurrency exchange.
What is liquidity?
In the cryptocurrency world, liquidity refers to the ease of exchanging one crypto to another, or one crypto to its fiat equivalent. An asset with high liquidity means that buy and sell orders are fulfilled faster than an asset with low liquidity.
Major order types
The major order types on most virtual currency exchanges are market orders and limit orders. With a market order, the buy/sell request is fulfilled at the current market price or average market price. A limit order, on the other hand, stipulates the buy/sell price. You decide for what price the order will be executed.
Another significant difference between these two types of orders is that a market order is not recorded on the exchange’s order book since it’s fulfilled immediately. A limit order is placed on the order book awaiting to be filled.
What is a market maker/ market taker?
A market maker is a trader who places a limit order, while a taker is a trader who places a market order. In simple terms: a market maker makes the order book and a market taker takes from a order book.
When it comes to paying for trading fees, market makers and takers are treated differently, considering their role in keeping the exchange going.
For example, market takers are charged more because they consume liquidity while makers are charged less because they contribute to the virtual currency exchange’s liquidity thus the order book. Think of an exchange as a shop, makers as suppliers, and takers as shoppers. The suppliers are charged less for putting items on the shelf while takers are charged more for taking items off the shelf.
Some charge, some give makers a free ride
Although the fees vary between exchanges, the reward system for makers and takers remains. For instance, on Binance, the maker/taker fees charged depends on the 30-day trading volume and trading level (VIP 0 to VIP 9). Traders with a 30-day trade volume greater than or equal to 150,000 Bitcoins (BTC) are charged 0.02 percent and 0.04 percent maker and taker fees.
However, some exchanges exempt makers from paying a maker fee, consequently attracting more activity and liquidity. Other exchanges, like Phemex, gives back to the market maker for creating the order book (a negative fee, the trader gets money for creating the book).
Advantages of market makers and takers
With the volatility of cryptocurrency prices, makers and takers help keep the prices on an exchange in control. This model prevents takers from depleting the liquidity and makers from placing orders that never get filled. Also, the maker-taker model contributes to having a steady price of the cryptocurrency.
In summary, the maker/taker model is necessary to keep the cryptocurrency safe from malicious manipulation or being affected by huge orders. The model also ensures there’s liquidity, which enhances the transaction times. However, makers pay less while takers pay more for the speedy fulfillment of their orders.