The understanding of market makers and takers ‘titles’.
Many exchanges charge fees according to the ‘maker-taker’ models. Look through the text to understand what are the principal differences between market makers and takers.
Makers and takers: major participants of the crypto market
Crypto traders are charged different fees. When a person transfers crypto funds to an exchange account, a deposit fee is charged. Withdrawal fees are charged when you move funds backwards. Meanwhile, these are network fees to form miners’ rewards. Besides, there are some fees charged by crypto exchanges or trading platforms for every successful deal. Many platforms use the ‘maker-taker’ fee system model.
Traders need to comprehend profoundly, what are market makers and takers to understand which amount of fee is about to be charged for a certain deal.
Two types of orders: which fees do exist?
The exchange orders are divided into two types: limit and market ones.
1. Limit orders, known as makers, are placed by traders who are expecting to purchase coins below the market price, and then sell virtual currencies more than fair value. In other words, traders set the prices for their orders on their own (maximum prices for purchase orders and minimum prices for sell orders). Traders have to wait for the moment a buyer or seller accepts the offered prices.
2. Market orders, known as takers, are placed by traders who are expecting to purchase or sell coins in correspondence with market prices. Buyers and sellers accept these offers instantly. This deal type is regarded as the most rapid.
Depending on the type of a deal, trading platforms charge different fees. Most platforms charge makers no fees in the majority of cases, while takers are charged more fees. Why does such a situation take place? You need to understand the notion of liquidity.
How are market makers and market takers linked with a platform liquidity?
The definition of liquidity is regarded as ‘an opportunity to sell assets quickly by fair value’. There are highly, medium, or low liquid assets. The easier a trader sells a certain asset, the higher its liquidity is. Meanwhile, the notion of makers and takers is connected with a trading platform’s liquidity.
There is a book of orders where all orders are placed for a certain trading pair (both purchase orders and sell orders). Don’t confuse makers and takers with buyers and sellers, as they may perform the functions of both. Makers serve as producers – they add orders to the book; therefore, increase a trading platform’s liquidity. Takers shorten the book of orders, and their activity leads to a trading platform’s liquidity dropping.
Market makers vs market takers cannot be analyzed separately, as both participants are interdependent. The first ones place orders, while takers close the orders. Market makers are traders who create purchase orders under the fair market price or sell orders over the fair market price. In both cases orders are not expected to be closed instantly. Every single maker needs a taker to close an order; otherwise, its terms will expire without any result. Hence, makers cannot exist without takers, and vice versa.
Why do trading platforms prefer to use the maker-taker model?
Let’s imagine the situation, a trader creates a sell order for Bitcoin at $11 000 per coin, while its fair market price is equal to $10 230. A trader expects the price of the first cryptocurrency to rise soon. Such an order is added into the order book of a certain trading platform. What does it obtain?
The placed order influences the platform’s trading volumes and stimulates other traders to make deals; hence, this sell order serves as a catalyst of activity and liquidity. That’s why trading platforms charge minimum fees from makers (in some cases those fees are equal to 0.00%).
Unlike the market makers method, takers are interested in the instant purchase or sale; hence, they sell Bitcoins by $10 230, and no orders are added to the book. A trading platform gets no long-term profit, and takers are charged higher fees.
Roles distribution: why do market participants are divided into two categories
New entries frequently ask why most traders cannot use the market makers options to minimize or avoid fees. The ‘title’ depends on certain goals and trading strategies.
Takers cannot wait till their order would be closed by the most preferred prices. Those market participants need to close a deal instantly. This category includes scalpers, day or swing traders who understand that several more hours or even minutes of waiting put them in the red.
The opposite situation concerns other participants. How do market makers make money? This category of market participants represents long-term investors mostly taking profits from the crypto market volatility.
Stop-loss and take-profit orders
Stop-loss and take-profit are understood as market makers signals, while traders use them, as well. A take-profit order closes a deal automatically to fix particular profit. For instance, a trader predicts the Bitcoin price to increase, placing an order to sell BTCs by $10 300, while its fair price is $10 230. When the price reaches that border, a deal will be closed automatically by the platform.
A stop-loss order helps traders minimize their losses. For instance, market makers are ready to sell BTCs by $10 000 in case of a price tumbling. These orders are placed as limit ones.
Resume. Key differences between makers and takers
To understand the key differences what is a market of takers and makers, look through the table:
• Attempt to purchase assets low than the fair market prices
• Intend to sell assets higher than the fair market price
• Are traders oriented to long-term investing
• Have been keeping their orders in the book for some time
• Maintain a trading platform’s liquidity
• Are charged minimum or no fees
• Buy assets by the market prices or even higher
• Sell assets by the market prices or lower
• Are traders who need to make deals instantly (scalping, day trading)
• Get their orders closed instantly
• Decrease a trading platform’s liquidity
• Are charged higher fees