Market Makers and Takers Explained

Every market has makers and takers. A maker is someone who places a buy or sell "limit order" that doesn't fill immediately. A taker, on the other hand, is someone who instantly buys or sells an asset at the market price. In other words, a taker fills the orders created by makers using a "market order".

What is a maker? 🤲

A maker provides liquidity by placing orders on the order book. For example, if you place a buy order for 10 BTC at $10,000, the order is added to the order book, and the purchase is completed when the price reaches $100,000.

The order sits on the order book without being filled immediately, and because it has made liquidity in the market, the person who placed it is called a maker. Simply put, if you compare an exchange to a supermarket, a maker is the person who puts products on the shelves and waits for customers.

However, using a limit order doesn't guarantee that it will be a maker order. If you place a limit buy order at a price higher than the market price, it becomes a taker order that fills immediately. Likewise, if you place a limit sell order at a price lower than the market price, the order is filled right away.

So, if you want to trade only with maker orders, you should consider options such as the Post-Only order condition. Alternatively, you need to make sure you place your buy or sell order precisely below or above the current market price.

What is a taker? 🫳

A taker "fills" the liquidity provided by makers. In other words, it's the person who takes the products displayed in the supermarket and pays for them.

For example, let's say a maker has placed a buy order on the order book for 10 BTC at $10,000. A taker can immediately sell 10 BTC into that order at $10,000 and receive USDT.

Because takers take liquidity this way through market buy or sell orders, they are called takers. A taker is someone who trades quickly by using the market's liquidity to get their trades filled fast.

Comparing maker and taker fees

On Bitcoin exchanges such as Binance and Bybit, you have to pay a certain fee every time an order is filled. Fee structures vary from exchange to exchange, and they differ depending on whether you are a maker or a taker.

Generally, makers receive a kind of rebate or discount because they add liquidity to the exchange. Takers, on the other hand, pay higher fees than makers because they take away the liquidity that makers provide.

Understanding why liquidity matters

Saying an asset is liquid means it can be sold easily. For example, 1 Ethereum is a highly liquid asset because it can easily be exchanged for cash in a short time.

However, a 10-meter-tall statue of Binance CEO Changpeng Zhao riding a bull is, sadly, a very illiquid asset. It might look great in your front yard, but realistically, not many people would want to buy it.

To sum up, a market with plenty of liquidity is one where you can quickly buy and sell assets at a fair value. It's a market with strong demand from people who want to acquire the asset and ample supply from people who want to sell it.

When liquidity is high, buyers and sellers meet at a reasonable middle point, and the spread, which is the price difference between the lowest sell order (the ask) and the highest buy order (the bid), is quite narrow.

In an illiquid market, on the other hand, supply and demand for the asset are out of balance, so trading at a fair price becomes very difficult. As a result, illiquid markets often have much wider bid-ask spreads, which leads to significant slippage.

Wrapping up

Let's sum it up one more time. A maker is a trader who creates an order and waits for it to be filled, while a taker is a trader who fills someone else's order. The key point here is that market makers are liquidity providers, and market takers are the ones who take that liquidity.

The maker-taker model built on the order book is one of the most efficient ways to connect people who want to buy and sell. Makers can buy and sell assets at the price they want with lower fees than takers. Takers, on the other hand, can buy or sell assets quickly whenever they want.