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Who are market makers and market takers

Updated: 49 minutes ago

The backbone of the market consists of makers and takers. Makers place orders to buy or sell, which are executed later when certain conditions are met (e.g., "sell BTC when the price reaches $15,000 USD"). This creates liquidity, allowing other users to instantly buy or sell BTC when order conditions are met. Users who instantly buy or sell assets are called takers. In other words, takers execute orders created by makers.


Introduction

The concept of makers and takers is crucial to understanding how trading works on an exchange. Makers create orders to buy or sell that will be executed in the future when the price reaches a certain level. This helps create liquidity in the market, enabling other traders to instantly buy or sell assets when conditions are met.

On the other hand, takers buy or sell assets immediately, executing orders created by makers. Some traders may simultaneously act as both makers and takers, creating orders to buy or sell while simultaneously executing them. This can be particularly useful when trading in rapidly changing markets where trading conditions can quickly change.

It is important to understand that the operation of many exchanges depends on makers and takers, and their presence (or absence) can significantly impact the quality of the exchange. Therefore, understanding the concept of makers and takers is an important aspect for any trader who wants to be successful on the exchange.


What is liquidity?

Let's discuss the concept of liquidity before moving on to the discussion of makers and takers. A liquid asset is easily sellable, whereas an illiquid asset is difficult to exchange for cash. For example, an ounce of gold is a liquid asset because it can be quickly sold at a fair price, whereas a ten-meter statue of the CEO of Binance riding a bull is an extremely illiquid asset because few people would be interested in buying it.

A similar but slightly different concept is market liquidity. A market is considered liquid if assets can be easily bought and sold at a fair price. With a high level of trading activity, the interests of buyers and sellers converge somewhere in the middle: the cheapest ask price will equal the highest bid price. As a result, the difference between the highest bid and the lowest ask will be small (narrow). This difference is called the spread between bid and ask.

On illiquid markets, on the other hand, there may be a problem selling assets at a fair price due to low demand, leading to a large spread between bid and ask.

So, we've recalled what liquidity is, and now we can move on to discussing market makers and market takers.


Market Makers and Market Takers

As mentioned earlier, traders on an exchange act either as makers or takers.


Makers

On the exchange, the market value of an asset is usually determined by the order book, which collects all bids and offers. For example, if a trader wants to buy 800 BTC at a price of $4000 USD, they submit a request that is added to the order book and executed when the price reaches $4000 USD.

A maker order (Post Only) like the example above needs to be added to the order book, thereby declaring intentions in advance. In this case, you act as a maker, creating demand in the market. You can think of the exchange as a grocery store that charges a fee for placing goods on the shelves - similarly, the exchange charges a commission for placing orders.

Market makers on the exchange are typically large traders and organizations engaged in high-frequency trading. However, small traders can also become makers by placing certain types of orders that are executed over time.


Takers

If we draw an analogy with a store, goods are placed on shelves for sale. In this case, the buyer is a taker. However, instead of cans, the exchange presents orders to buy and sell cryptocurrency, which form market liquidity.

Thus, by placing your orders in the order book, you increase the liquidity of the exchange, facilitating other users to make transactions. At the same time, a taker slightly decreases market liquidity by placing a market order to buy or sell cryptocurrency at the current market price. In this case, orders from the order book are executed immediately.

To become a taker on the exchange or cryptocurrency trading platform, you need to place a market order. You can also act as a taker through limit orders: by executing other people's orders, the trader always acts as a taker.


Maker and Taker Fees

Many exchanges generate revenue from trading fees between users. Each time a trader creates and executes an order, they must pay a small fee. The size of the fee may vary on different exchanges and depend on the trader's role and the size of their trade.

In order to attract more liquidity, makers typically receive rebates (a portion of the fee returned) for each successful trade. This is important for the exchange because high liquidity attracts more traders. An exchange with high liquidity is usually more attractive because trades are executed faster and easier. Fees for takers, on the other hand, may be higher because they do not provide liquidity. The fee structure may vary on different exchanges.


Summary

Makers create orders and await their execution, while takers execute them. The key here is that market makers are liquidity providers.

On exchanges using the maker-taker model, makers contribute to the attractiveness of the platform as a trading venue. For providing liquidity, exchanges reward makers with reduced fees. Takers, on the other hand, utilize this liquidity for easy and quick buying and selling of assets, for which they pay higher fees.


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