What are Maker and Taker Fees in Crypto Trading? – Explained with Example
Whenever it comes to crypto trading, maker and taker fees are two terms that you get to hear a lot. With every trade you execute, there is a maker and taker fee. So the question is, what do these two terms actually mean?
Well, in case you are wondering the same and want to understand the science behind it, then you are in the right place.
In this article, I will be explaining both maker and taker fees in brief to help you understand better. Also, we will review Bybit exchange understanding it’s fee when you’re making a crypto trade with them. So let’s get into the topic right away:
What are Market Maker and Taker in Trading?
In any type of market, there are two types of traders. These traders are known as market makers and market takers.
The job of market makers is to buy at the current best bid or sell at the current best offer. As a result, they make a market which is reflected in the current last price. Plus, they create liquidity in the market.
Also, market makers are always looking to buy or sell. But in extreme volatility, they might not take any trade.
On the other hand, there are market takers who are less concerned about executing their bids at the best price possible. Instead, they seek immediacy and liquidity, which market makers provide.
However, to help you understand better. Here is a detailed explanation:
The market makers seek a premium from the market taker. As they are providing constant liquidity in the market. This premium is called an edge which is typically quantified as the difference between the bid and the offer.
The market makers generally do not care whether they are long or short on crypto when they change their positions. Their simple goal is to be always positioned in the market. As they are trading with the edge. Hence, they can get potential profits with relatively low risk.
Also, every time they are not in the market imposes an opportunity cost on them. As a result, market makers often operate in different markets at the same time. As a result, their profits are not limited to one type of market.
Market takers need immediacy and liquidity to execute their trades. They want the market to have constant liquidity to enter into a trade at a reasonable price and close the trade at their desired price.
Also, they accept the fact that the edge or premium must be given up for the service provided by the market makers.
Plus, unlike the market makers, the takers change their position in the market less frequently. Also, they are less concerned about trading costs.
But yes, there are market traders who trade frequently. But the market always tends to be more active in terms of volume and number of transactions. As this is what fetches them profit.
What is Maker’s fee in Crypto?
A maker fee is basically a certain amount that gets applied to an order which gets executed on a trading platform. Also, when you place an order in the market, you are adding liquidity to the exchange.
The liquidity will only be created when you place an order on an exchange, and another trader will execute it. As it requires two traders to execute a trade.
By placing the order for another person to execute, you are adding liquidity in the order book as a trader. As a result, you are playing the role of the maker, and you will get charged a maker fee when the order is executed by another trader.
A maker order works by placing a pending sell order which is higher in price than the highest buy order on the platform. Or a buy order which is lower in price than the lowest sell order on the exchange.
By placing an instruction to sell at a higher price in the market, the pending order will add liquidity in the order book and will get charged a maker fee.
For instance, if ETH/USDT is trading at $4,000, then the trader will have to place a limit order to sell ETH at a price above $4,000.
But if the order is not filled at the current price or matches with any of the orders, then it will add liquidity in the order book.
What is Taker’s fee in Crypto?
The taker fee is the cost that gets applied to an order when executed on a trading platform. This gets charged for placing an order in the market, resulting in removing the liquidity from the exchange.
This involves placing an order on the market to execute immediately or as soon as it matches another trader’s order. This way, takers are taking away the liquidity from the market.
Takers are fulfilling the available orders in the order book through buying and selling. As a result, you have to pay a taker fee when an order gets executed.
The market order works by placing a market order which is matched immediately in the order book for the trading fair. But in case, if there is not enough liquidity in the order book to fill the order, then it will get rejected or partially filled.
However, when you place a limit order which gets matched right away within the order book. The taker will have to pay a slightly high fee which is known as the faker fee. The taker fee is basically paid for the fast execution of orders and for convenience.
Understanding Maker-Taker Fees with ByBit Exchange
So far, we went through the science behind the maker and taker fee. But the question is, how does it apply in a real life trade?
Well, for this example, we are going to use the ByBit exchange. It is one of the well known exchanges which offers leverage trading on crypto assets and has affordable maker and taker fees.
Anyway, here is how maker and taker fees occur:
Before we go ahead, one thing that should be clear about is that maker fees get charged when your order doesn’t get executed right away. If it does, then taker fees are charged.
Also, in exchanges where the taker fee is high, you should consider paying maker fees if possible. To pay maker fees, you will need to set limit orders.
Talking about By bit, the exchange differentiates between maker and taker fee on the basis of how quickly an order gets executed.
Market orders which buy or sell at the best price in the market, it charges a taker fee. But when you place a limit order, you help create a market. As a result, it charges a maker fee.
By bit and most other exchanges uses this below formula to calculate the maker and taker fee:
Trading Fee = Filled Order Quantity x Trading Fee Rate
For instance, if the price of Bitcoin is $40,000, then traders can buy or sell 0.5 BTC with 20,000 USDT.
A trader buys 0.5 BTC using a Market Order using USDT. Trader B buys 20,000 USDT USDT using a limit order with BTC.
In this case, the taker fee for Trader A will be 0.5 × 0.1% = 0.0005 BTC. While the maker fee for Trader B would be 0 USDT.
Once the order is filled, Trader A will buy 0.5 BTC with a Market Order. As a result, trader A has to pay the taker fee of 0.0005 BTC. As a result, Trader A will receive 0.4995 BTC.
On the other hand, Trader B purchased 20,000 USDT with a Limit Order. In this case, there is no trading fee required, and the trader will get 20,000 USDT.
What Are The Pros & Cons of Maker Orders?
In most exchanges, maker fees are lower than the taker fee. This is to encourage the trader’s to add liquidity in the market. As higher liquidity in the order books can offer lower spreads between the bid and ask price. This allows the traders to execute positions with minimum slippage.
However, the only drawback of maker orders is that it takes time for a buyer to fill an order. Or, in some cases, your order may be stuck on the order book and never get fulfilled for a specific trading pair. Or you may not find a buyer or seller at your maker order price.
What Are The Pros & Cons of Taker Fees?
The benefit of using a taker order is that the order gets executed immediately on the exchange at the current market price.
As a result, you as a trader can execute trades rapidly without waiting for another trader to fulfill your order.
The benefit of using a taker order is the order will be filled instantly on the exchange at the current market price. This means a trader can execute a trade rapidly without having to wait for another trader to fill the order.
However, the disadvantage of using taker orders is that some exchanges will charge you a higher fee. As they are removing liquidity from the exchange to match your order immediately.
Also, in most cases, the order will get executed at a lower sell price, or you will have to pay a high buy price compared to the market order.
So that was all about what are maker and taker fees in crypto trading. I hope this has helped you to understand when and why the maker or taker fee gets charged. In case if there is anything else you would want to ask, drop a comment below.