Maker vs. Taker Crypto Trades: A full explanation
Outline:
After reading this article, you will know what is the difference between maker and taker trades in crypto trading, why it is important, what type of trading orders qualify for maker and taker trades, how to execute maker vs. taker trades, and how to save fees and improve your trading profitability through strategically executing maker vs. taker trades.
Moreover, you will understand the benefits and risks of maker vs. taker trades and know why maker trades are significantly cheaper than taker trades.
Intro:
If you are coming from a different trading market such as Forex or commodity trading or are completely new to trading, the differentiation of maker vs. taker trades in the Crypto market may not be familiar to you. A trade execution as maker or taker describes whether you are making liquidity for the market or whether you are taking liquidity from the market. For a trade to be executed, there needs to be a market maker and a market taker. Still confusing? Let’s break it down step-by-step:
Maker vs. Taker detailed explanation:
As a maker, you are giving liquidity to the market by specifying that you would buy or sell a certain amount of the asset for a specified price. You are “making” the liquidity. The position is not immediately executed, only when someone else is willing to trade with you at that price level. In a way, as a maker you are enabling other traders to immediately execute their trades as a taker, as they can choose to buy or sell you the asset at your specified price. On the other hand, as a taker, you are “taking” liquidity from the market by directly executing your order. In order to see the current limit orders in a market, you will have to look into the order book.
Order types — market vs limit order:
Let’s put it into more practical terms and I am going to guide you through an example in my own trading account in a minute. There are two overall order types in trading, a market order, and a limit order. In a market order, your trade will be executed directly at the best available price, while for a limit order, you specify at which price you would be willing to buy or sell a certain amount of assets. You see where I am pointing at. Simply put, a market order will create a taker trade, you are taking liquidity from the market, while a successfully executed limit order creates a maker trade. You provided liquidity to the market by specifying a price and amount of assets you would be willing to trade, and someone else took your liquidity off the market by filling your order. Both order types have their upsides and downsides, but let’s first of all have a look at an example in my trading account.
Limit order:
I am logged in to ByBit here right now and have the ETHUSDT futures contract open. As you can see on the right side here, we have the order book. Recalling what we said earlier, the order book shows the liquidity that is in the market, so all those entries which you see here with the specified price and quantity is the sum of limit orders in the market at the respective price levels. Looking even a little bit more to the right, you can see the trade input mask. And here you also already see the order type which we can choose: Limit or market order. For the limit order, you can see that we have to specify the price and quantity of our trade in order to position that order in the market and create the liquidity. The order will only be executed in case there is someone else that is willing to trade with us at this price.
Market order:
If we click on the market order, you can see that we only have to specify the quantity, no price, because the order will be executed right away at the best available price. The best available price is a bit tricky, looking into the order book we can see how much liquidity there is at the different price points. If we were to execute a large order, lets say 1000 Ethereum, you can see that we wouldn’t be able to get the current market price, because there is not enough liquidity in the market for that. A market order will take the liquidity from the order book of higher price levels then until the whole 1000 ETH will be filled, which will lead to a slightly worse executed average price as the current market price. Let’s do a quick example though.
→ watch how we did the trade here
We go back to limit order and try to get into the market. Just for showcasing, let’s buy 0.1 Ethereum with 100x leverage. We place our price we would be willing to pay just below the current market price so hopefully it will be executed quite quickly for this example. We can see that the order was filled now and that we are 0.1 ETH long. Let’s now close the order with a market order, hence taking liquidity off the market. We click on “market” again, enter our quantity and close the order. As you can see, the order was executed right away. Because the order was so small, there is also pretty much no slippage.
Now let’s actually quickly look at the trade history to understand again what just happened. We see that we performed the ETHUSDT trade of 0.1 ETH. Our first trade was executed as limit order and our second trade was executed as market order. You can also directly see the fee effect: For our limit order, we paid a fee of 0.01% of our order value, while for the market order, we paid 0.06% of our order value. This seems like very small numbers, and it is because this was just a tiny example trade.
However imagine you are having a couple of thousand USD on your account and you trade with 100x leverage. Let’s say your trade size is 100,000 USD. If you do 5 roundturns a day, so in total 10 trades with opening and closing the trade, that is one million total volume for the day. Paying 0.06% as taker on a million dollar a day is actually 600 USD in fees in just one day, while for 0.01% maker fees it would have only been 100 USD. The fee levels among the exchanges differ widely though and are very hard to compare because of the different tier requirements at each exchange, that’s why we have developed dr-fee.
Link to dr-fee: HERE
Link to data input for fee analysis of dr-fee: HERE
Let’s go to the manual data insert part of dr-fee, and if we type in the 1 million USD futures volume a day or 20 million a month of our example just now, assume we have 100% taker trades, 10,000 USD on the account and do not hold any native exchange token, we can see exactly see how much fees we would pay in this scenario at all the major exchanges.
At ByBit, in this scenario the trader would pay 120,000 USD in trading fees for the whole year, while at Kraken for example, the trader would have only paid 48,000 USD, or 60% less. At OKX or Bitfinex, the trader would have paid even more though. So how would the situation be if we would have executed all trades as a maker instead of as a taker?
Surprisingly, ByBit is now the cheapest exchange among all the major crypto exchanges with only 14,400 USD yearly fees. At Binance or at OKX, the trader would have paid more than 40,000 USD or 3x as much or more. Every trader has a different volume, different balance and holding, and a different style of maker and taker trades, therefore everyone has their own most fee efficient exchange. You can freely find yours at dr-fee.com.
Risks: Market vs. Limit orders
Let’s get back to the maker vs. taker trades again though, and as you just saw, whether acting as a maker or taker in the market, so executing your trades with a limit or market order can have a huge effect on the fees, in the case of ByBit nearly 10x as much fees for taker trades vs. maker trades. So why would traders execute their trades as market order?
Well, first of all for every trade there needs to be a maker and a taker, otherwise the trade would not be executed, so yes there are a lot of taker trades. With a limit order, the biggest risk is that your order is not executed and that you are actually not getting in or out of a trade. In many cases, especially for exiting the trade, it can be very important to very timely exit your trade, especially if actively trading on smaller timeframes. Moreover, having very large limit order, you can run into the risk that the price actually reaches your specified level, but there is not enough taker volume at this price level so you only partially have your order filled.
On the other hand for market orders, imagine my example of 1000 ETH trade from earlier, this would have had already a bit of a price effect. 1000 ETH is actually only a bit more than a 1.5 million USD in one trade, and there are much bigger traders out there. If you now place a very large market order, your price effect can be very high depending on the market depth, leaving you with a significantly worse price. There can be good reasons for both maker and taker trades, and it oftentimes depends on the respective strategy or trading volume of the trader. From an exchange point of view, it is very understandable why maker trades are much lower priced compared to taker trades. An exchange always seeks to have a lot of liquidity in the order book for an asset, because only this enables trading on which they earn their fees. The higher the liquidity, the less price effect there is for also larger market order executions. This goes up to the point that maker fees are actually negative for large volume traders or professional market makers, enabling them to make money by providing liquidity to the market.
As a personal retail trader, trading fees very easily eat up all the trading profit or even more, that’s why it is so important to keep trading fees low. Besides finding your best suited exchange for your trading style and volume, having as many maker trades as possible is another important factor in actually limiting the negative effect of trading fees on your performance. If not necessary to open or close a trade with a market order, it can well be worthwhile to consider increasing your share of limit orders. It doesn’t only help your fees, but you can also be sure of the entry or exit price you are receiving for your trade.
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All information in this article may not be up-to-date anymore while reading and should not considered to be financial advice!
