Market Makers and Market Takers Explained

TL;DR

Markets are made up of makers and takers. The makers create buying or selling orders that aren’t carried out immediately (e.g., “sell BTC when the price hits $15k”). This creates liquidity, meaning it’s easier for others to instantly buy or sell BTC when the condition is met. The people that buy or sell instantly are called takers. In other words, the takers fill the orders created by the makers.

Introduction

On any kind of exchange (whether Forex, stocks, or cryptocurrency), sellers are matched with buyers. Without these meeting points, you’d need to advertise your offers to trade Bitcoin for Ethereum on social media and hope that someone is interested.

In this article, we’ll discuss the concept of makers and takers. Every market participant falls into at least one of these categories – indeed, as a trader, you’ll probably act as both at some stage. Makers and takers are the lifeblood of many trading platforms, and their presence (or lack of it) separates strong exchanges from weak ones.

Let’s talk about liquidity

Before we can delve into makers and takers properly, it’s important to talk about liquidity. When you hear someone say an asset is liquid or an asset is illiquid, they’re talking about how easily you can sell it. 

An ounce of gold is a very liquid asset because it can easily be traded for cash in a short period of time. A ten-meter tall statue of the Binance CEO riding a bull, unfortunately, is a highly illiquid asset. Though it would look great in anyone’s front garden, the reality is that not everyone would be interested in such an item.

A related (but slightly different) idea is that of market liquidity. A liquid market is one where you can buy and sell assets easily at a fair value. There’s high demand from those who want to acquire the asset and high supply from those who want to offload it. 

Given this amount of activity, buyers and sellers tend to meet in the middle: the lowest sell order (or ask price) will be around the same as the highest buy order (or bid price). As a result, the difference between the highest bid and the lowest ask would be small (or tight). By the way, this difference is called bid-ask spread.

Conversely, an illiquid market shows none of these properties. If you want to sell an asset, you’ll have trouble selling it at a fair price because there isn’t as much demand. As a consequence, illiquid markets often have a much higher bid-ask spread.

Okay! Now that we’ve covered liquidity, it’s time to move onto the makers and takers.

Market makers and market takers

As mentioned, the traders that flock to an exchange act as either makers or takers. 

Makers 

Exchanges often calculate the market value of an asset with an order book. This is where it collects all the offers to buy and to sell from its users. You might submit an instruction that looks like the following: Buy 800 BTC at $4,000, for example. This is added to the order book, and it will be filled when the price reaches $4,000. 

Maker (Post Only) Order like the one described requires that you announce your intentions ahead of time by adding them to the order book. You’re a maker because you’ve “made” the market, in a sense. The exchange is like a grocery store that charges a fee to individuals to put goods on the shelves, and you’re the person adding your own inventory.

It’s common for big traders and institutions (like those specializing in high-frequency trading) to take on the role of market makers. Alternatively, small traders can become makers, simply by placing certain order types that aren’t executed immediately.

Please note that using a limit order does not guarantee that your order will be a maker order. If you want to make sure the order goes into the order book before it is filled, please select “Post only” when placing your order (currently only available on the web version and desk version).

Takers

If we keep the store analogy going, then surely you’re putting your inventory on the shelves for someone to come and purchase it. That someone is the taker. Instead of taking tins of beans from the store, though, they’re eating into the liquidity you provide.

Think about it: by placing an offer on the order book, you increase the liquidity of the exchange because you make it easier for users to buy or sell. On the other hand, a taker removes part of that liquidity.  with a market order – an instruction to buy or sell at the current market price. When they do this, existing orders on the order book are filled immediately.

If you’ve ever placed a market order on Binance or another cryptocurrency exchange to trade, say then you’ve acted as a taker. But note that you can also be a taker using limit orders. The thing is: you are a taker whenever you fill someone else’s order. 

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Maker-taker fees

Many exchanges generate a considerable portion of their revenue by charging trading fees for matching users. This means that any time you create an order and it’s executed, you pay a small amount in fees. But that amount differs from one exchange to another, and it may also vary depending on your trading size and role.

Generally, makers are offered some kind of rebate, as they’re adding liquidity to the exchange. That’s good for business – prospective traders think oh wow, look at this platform and its high liquidity, I should trade here. After all, such a venue will be more enticing than one with less liquidity, as trades are more easily executed. In many cases, takers pay higher fees than makers, as they don’t provide the liquidity that makers do.

As mentioned, the maker-taker fee structure depends on the platform. For example, you can see the difference in maker-taker pricing for Binance on its Fee Schedule page.

Closing thoughts

Summing it up, makers are the traders that create orders and wait for them to be filled, while takers are the ones that fill someone else’s orders. The key takeaway here is that market makers are the liquidity providers. 

For exchanges that use a maker-taker model, the makers are vital to the platform’s attractiveness as a trading venue. Generally, exchanges reward makers with lower fees as they provide liquidity. In contrast, takers make use of this liquidity to easily buy or sell assets. But they often pay a higher fee for this.