What are the differences between crypto market maker and taker? Ideally, every market is made up of makers and takers. It is the market makers who create the buying or selling orders.
These orders are however not carried out immediately but are only done when the given condition is fulfilled. For example, an instruction such as ‘sell BTC when the price hits $10k’ will only be carried out when the price reaches 10k.
And, the market takers fill those orders. However, this is not the only difference between the two. If you want to know more about them, read on.
In the literal sense, the market makers create liquidity which means that they make it possible for others to buy or sell the particular type of crypto coins instantly when the specified condition is met. Now, the people that buy or sell the coins are called market takers.
This is not restricted specifically to crypto trading. In fact, the market taker and market maker model is followed in all types of trading in general.
Typically, on any type of exchange, whether it is stocks, forex, or cryptocurrency, the sellers are usually matched with the buyers.
It is for this reason sellers need to advertise their trades on different platforms, especially on social media, to create such meeting points.
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7 Differences Between Crypto Market Maker and Taker
Every participant of any market actually falls in either of these two categories, at least, though a trader may act as both a market maker and a taker at some stage.
It is this concept or model that is the lifeblood of all the trading platforms. Ideally, it is their level of presence that separates the best trading platforms, even for crypto assets, from the weaker ones.
Crypto exchanges may have different fee structures for market makers and takers, but usually, the makers are incentivized with lower fees.
This is done because the exchanges always want to have trade orders because people will not visit those exchanges that do not have any of such orders.
Put in simplest of words market takers are those who fill the orders that are created by the market makers. Check out Differences Between BNB and wBNB.
However, the concept of market makers and market takers is much broader than that. Here are a few significant differences for you to know to have a better and much clearer idea.
1. The Players
Both market makers and market takers flock to a crypto exchange to facilitate a trade. A market maker can be an individual or a high-frequency trading firm, but the volume will be different.
The business models of these trading firms primarily depend on the dedicated trading strategies that are built with an intention to capture payments. Ideally, market makers offer prices to buy and sell assets.
On the other hand, a market taker can either be a large investment firm wanting to buy or sell larger blocks of crypto stocks or even a hedge fund that generally bets on price movements in the short term. The market takers can also be small traders, investors, producers and consumers.
2. Prime Objectives
The primary goal of the market makers is to always be positioned in the market, no matter what. It is for this reason that they are happy to turn their positions over rapidly without caring much whether these are long or short.
This is because they want to make the best of every moment in this volatile market and have an edge to make more potential profits without having to endure too high a risk.
On the other hand, if the market makers are not positioned in the market it will impose an opportunity cost. It is for this reason the market makers typically operate in several different crypto markets at the same time.
This enhances their chances to make more profits since their profitability will not be restricted to the order flow of any one particular crypto market.
Typically, the market makers are much more active than the market takers but only in terms of the number of transactions made and their volume. It is simply due to the character of their business.
In comparison, the primary objective of the market takers is to ensure that the market offers a reasonable price and that it is offered right at the time when they need or want to enter into a trade or close their existing position.
Though there are quite a lot of these market takers who like to trade frequently, they are often willing to accept the fact that they will have to pay something in return for the opportunity provided by the market maker.
It is for this reason the market takers are not keen to turn over their positions as frequently as the market makers. This means that they are not concerned much about the trading costs.
3. Liquidity
The market makers place the sell order for a crypto asset which creates liquidity. This is the situation when a specific asset can be bought or sold. Therefore, the market makers create the order book.
The market takers, on the other hand, are those who fulfill those orders after the specific condition is met, thereby facilitating a trade. This means that the market makers take from the order book.
4. Volatility and Immediacy
Apart from liquidity, the market takers also prefer immediacy. This preference by them is further enhanced due to the constant volatility of the crypto market and product prices.
This results in a consistently tight bid-ask spread. This is ideally produced by the market makers and in turn, it makes the relationship between the market makers and takers more symbiotic. This means that each of them needs one another so that they can thrive in this volatile crypto market.
The market makers, on the other hand, are more concerned with executing and fulfilling their orders at the best offer or bid possible. They do not rely on immediacy as much as the market takers do.
Instead, they wait to get the best bid and sell their assets at the best available price. However, it is not their nature to buy and sell their crypto assets always. At times when the crypto market experiences extreme volatility, the market makers may intend to move away from it.
5. Market Value
As far as the market makers are concerned, the crypto exchanges typically calculate the market value of a particular crypto asset based on the order book. This book is where all the offers for buying and selling are collected from the users of the platform.
Instructions like ‘Buy 400 BTC at $1,000’ are recorded in this order book and will only be filled when the price of BTC reaches $1,000. Such instructions are made by the makers ahead of time.
They are therefore considered to be the creator of a specific market value for a product and perform their activity before that market value is reached.
The market takers are the ones who purchase the crypto asset which is actually consuming the liquidity provided by the market makers when they place an order in the order book.
Ideally, the liquidity added by the market maker is removed by the market taker by buying the product at the prevailing market price. This is when the order is filled based on the market value.
Therefore, when the takers fulfill someone else’s order only when the value of the particular product reaches the amount specified before by the market maker.
6. Fees
The crypto exchanges charge a fee from the traders by matching them on the platform. This fee makes a considerable part of the revenue of the exchanges. In the maker-taker model, any time and every time an order is created and executed, the trader needs to pay a small fee to the exchange.
This amount may vary from one exchange to another as well as on the size of the trade and the role played by the maker. Usually, the market makers get some sort of rebate in the fees since they are adding liquidity to the platform.
On the other hand, the market takers are usually charged a higher fee while making a transaction for removing the liquidity created by the market makers. As for the exchange, it is the difference between the maker and taker fees which they keep as their revenue.
Therefore, the higher the liquidity, the better it is for the crypto exchange to make more revenue. Once again, the structure of the taker fees may vary from one trading platform to another as well as on their policies.
7. Effects
The makers, as well as the maker fees, affect the crypto market in a different way than the taker fees. For example, the limit order placed by the maker for a trade on an exchange as well as the maker fees usually is not filled immediately.
Rather, it is set off only when the price of the asset rises or falls below the specified limit in the order. As for the makers, they affect the market by offering other traders new options. The maker fees for orders are usually lower than the other fees charged by the exchanges.
This motivates the makers to create more liquidity for the platform which signifies the degree of market interest. This is typically based on the number of dynamic traders on the platform as well as the size of the trading volume overall.
However, the only disadvantage of this is that the makers have to wait for a considerably long time in order to fill their order only when the set price is reached. Therefore, the fees by the exchanges cannot be charged until then.
On the other hand, the taker fees affect the market relatively quickly than the maker fees. This is because the orders are filled as soon as the takers make a purchase or the order is filled.
This means that the exchanges can charge their fees immediately as well. Since a market order relies on its immediacy, the taker fees are charged by the exchanges immediately upon execution of the order.
If, in case, there is insufficient liquidity, the market order will not be filled but rejected since it can either be filled completely or rejected. If it is filled, the slightly higher taker fees provide immediate revenue to the exchange.
It is good to note at this point that even if there is a stop limit order placed, the order will stay in the order book till the time it is filled and then the fee will be charged. This will have a significant effect on the market because it will help significantly in steadying the price of the particular crypto coin.
Which is More Necessary – Crypto Market Maker or Taker?
In order to know who among the market makers and takers are more significant in the crypto market, you will need to have a clear idea about liquidity first.
In simple words, when people say that a particular asset is liquid they actually refer to how easily it can be sold. An illiquid product will be difficult to sell off.
For example, a piece of gold is highly liquid as compared to a marble statue. This is because gold can be traded easily for cash but a statute cannot be sold easily and quickly in comparison.
Though the statue may look beautiful in the garden or in your living room, fewer people would be actually interested to buy it than gold.
It is a pretty similar concept when it comes to market liquidity. A liquid market is that place where you can buy or sell assets easily at their fair value.
This means that the market should have a high demand for the particular asset from those who want to buy it and a high supply of it from those who want to sell it off or offload it.
Keeping this concept in mind, in a marketplace, the buyers and sellers are in the middle and they meet here to facilitate a trade.
As for the price of the product, the sell order or the asking price is kept at the lowest but it is close to the maximum buy order or bid price.
This means that there will be a small difference between the lowest asking price and the highest bid price, if it is a liquid market. This is called the bid-ask spread in trading terminology.
On the other hand, if the market is illiquid it will not show any of these properties. This means that the sellers will usually have a hard time selling an asset at its fair value since there won’t be much demand for it.
As a result of this low demand, an illiquid market typically has a much higher bid-ask spread.
Now coming to the concept of market makers and takers, as said earlier, the market makers create liquidity by placing sell orders and the market takers fulfill it.
However, at this point, it is important to know that the market makers guarantee efficiency in trading since they hold a large number of assets ready to be sold or bought at a very short notice.
The crypto exchange in particular has an overriding interest in such types of traders since it facilitates in creating higher trading volume on the platform. This is why they are incentivized adequately.
In a crypto market, the market maker-taker model is actually the opposite of that of a traditional design where customers are a priority.
Typically in a customer priority model, the customer accounts are charged market maker fees by the exchanges to make a transaction and/or to collect payments for any order flow.
These payments are subsequently channeled to the brokerage firms so that they can attract more orders for that particular exchange.
The maker-taker model is nothing new. In fact, it dates back to 1997 when Joshua Levine, the creator of the Island Electronic Communications Network, created a unique pricing model.
This model offered narrow spreads which incentivized the providers to trade in the markets.
Later on, the maker-taker model was implemented in several different markets in the 1990s. There have been several regulatory changes made in this model but this model is here to stay even if there are significant changes noticed in its practice and execution.
Now the cryptocurrency exchanges use the maker-taker model for specific reasons and it is quite necessary.
Typically, those markets that experienced a lot of high-frequency trading may suffer from the adverse effects of diminishing liquidity due to rapid trading.
This alters the prices which significantly benefits the short-term traders and hurts the long-term traders since they want to make larger profits in a quick time.
Such a behavior of the market is undesirable and therefore the crypto exchanges charge maker-taker fees according to the maker-taker market model simply to offset this behavior.
They typically charge a higher fee from those people who want to trade quickly. This means that traders who want to ‘take’ immediately will have to pay for it.
As for the maker and taker fees, though these may vary from one exchange to another, the reward system for all is usually the same for both the makers and takers. It is calculated on the basis of the trading level and volume.
However, there are a few specific crypto exchanges that may exempt the makers from paying any fees in order to attract more liquidity and activity.
Also, there may be a few other exchanges that may even give back to a market maker in the form of a negative fee for creating an order book.
Therefore, considering all the facts, both market takers and makers are necessary for a crypto market since they offer a host of advantages.
First, considering the volatility of the prices of crypto coins, the market makers and takers help in keeping these prices on a crypto exchange in control.
The market taker and maker model also prevents the takers to deplete the liquidity in the market created by the market makers because they can never place orders that cannot be filled.
Finally, the market taker-maker model ensures that the price of the crypto assets remains steady over time.
This model also ensures enhancement of liquidity of the assets which helps in boosting up the transaction time.
Though the market makers pay less and the market takers pay more in transaction fees, they can make the best use of the liquidity created by the market makers allowing a speedy fulfillment of the orders and enhancing the attractiveness of the trading platforms.
Therefore, to conclude, it can be said that the market makers and takers are both necessary for a crypto market to keep the assets safe, liquid, and free from being affected due to huge orders or malicious manipulation.
Conclusion
To sum up, it can be said that market makers and takers are both important for a platform to exist and survive. After reading this article, the concept should be clear and now you can easily decide whether you are a market maker or a taker.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.
