Ever wondered how Bitcoin is marketed or exchanged? This answer is in the concept of Market Maker and Market Taker. Without realizing it, we may have acted as one of these. This article will discuss what a market maker and market taker are and their costs.
Getting to Know Liquidity
Before rushing into the meaning of Market Maker and Market Taker, it is important to discuss liquidity. Liquidity here is about whether or not an asset can be sold easily, that's why there are the terms liquid assets and illiquid assets.
An easy example is that an ounce of gold is a very liquid asset because it can easily be exchanged for cash without a long time. However, a painting of a company CEO that looks luxurious could be a very illiquid asset, this is because few people might be interested in this item.
Understand the concept in market liquidity. A liquid market is a market where buying and selling assets can be easily done at a reasonable value. This means there is high demand for assets and high supply too.
With this level of activity, buyers and sellers tend to meet in the middle: the lowest sell order (or ask price) will be about the same as the highest buy order (or bid price). As a result, the difference between the highest bid price and the lowest ask price will be small (or tight). This difference is called the buy-sell spread.
Also read: What is a Liquidity Pool?
Market Maker and Market Taker
After understanding the concept of liquidity, now is the time to understand the main discussion topics, namely Market Market and Market Taker. By this we can understand that people gathered at an exchange can act as one of them.
What is a Market Maker
Exchanges often calculate the market value of an asset with an order book . Here, all buy and sell offers are collected from users. You might send instructions that look like this: Buy 800 BTC at $4,000, for example. It is added to the order book, and will fill when the price reaches $4,000.
Market Maker Orders as described require you to announce your intentions in advance by adding them to the order book. You are a Market Maker because you have "made" the market, in a sense.
Exchanges are like grocery stores that charge individuals to put items on the shelves, and you are the one adding your own inventory.
Typically, large traders and institutions (such as those specializing in high frequency trading) take on the role of Market Maker. Alternatively, small traders can become Market Makers, simply by placing certain types of orders that are not executed immediately.
What is a Market Taker
If we stick with the store analogy, of course you put your inventory on the shelves for someone to come and buy it. That person is a taker (Taker). Instead of grabbing those cans of beans from the store, they take away the liquidity you provide.
Placing a bid 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, takers remove some of that liquidity with market orders – instructions to buy or sell at the current market price. When they do, existing orders in the order book are instantly filled.
If you have ever placed a market order on a crypto exchange to trade, then you have acted as a taker.
But it's worth noting that you can also be a taker using limit orders. Bottom line: You are the taker every time you fill someone else's order.
Market Maker and Market Taker Fees
Many exchanges generate most of their revenue by charging trading fees to match users. This means every time you place an order and it is executed, you pay a small fee.
But that amount differs from one exchange to another, and can also vary depending on the size of your trade and your role.
In general, makers usually get some type of rebate, as they add liquidity to the exchange. That's good for business - prospective traders think with this platform and its high liquidity, it's an ideal place to trade.
In any case, such a venue will be more attractive than one with lower liquidity, as trading is easier to carry out. In many cases, takers pay higher fees than makers, because they do not provide the liquidity that makers do.
Conclusion
In conclusion, market makers are traders who make orders and wait for those orders to be filled, while market takers are those who fill other people's orders. The key point here is that Market Makers are liquidity providers.
Through the trading concept above market maker and market taker it becomes easier to understand. What roles have you done?
Also read:
What is a Limit Order or Limit Order?
What is the Limit, Market, Trigger Order Method?
What is an Automated Market Maker?
What is Gwei and How is it Calculated?
DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.
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