Over the last few years, the cryptocurrency market has matured – from the narrow circle of crypto enthusiasts to institutional adoption. This shift created the need for large and reliable trading platforms that could offer sufficient liquidity, security, compliance, and trading tools.
An institutional trading platform is an environment where traders pour billions of dollars and expect smooth and efficient execution of transactions, and liquidity stands at the core of it. Sufficient liquidity creates a healthy trading environment, attractive markets, and smooth trade execution. Who takes care of liquidity? Let’s find it out in this article.
Who Are the Market Makers?
A market maker is an individual or entity that provides liquidity to the market. While retail traders may contribute to liquidity, the lion’s share of liquidity provision belongs to high-frequency traders and institutions, as they operate much larger trade volumes, compared with retail traders. Depending on the market maker program, financial entities and institutions make their profit from traders’ fees and bid-ask spreads.
How do market makers work? A market maker creates an order to buy or sell assets at a pre-set criteria. That is if someone places an order to buy 3 SOL coins at $58, the order will be fulfilled right once the SOL price reaches the level of $58. So, market makers “make” a market by placing their orders in the order book.
Unlike makers, takers “take out” liquidity from the market by placing an order to buy or sell assets at the present market rate. The platform executes such orders using maker’s offers.
Comparing price maker vs price taker, we can briefly conclude:
- Makers create a two-sided market by offering to buy at a slightly lower price (bid) than the current market price and sell at a slightly higher price (ask)
- Takers initiate trades by accepting the best available bid or ask prices set by market makers or existing orders on the order book.
So makers create liquidity, while takers execute this liquidity.
Maker vs Taker Fees
When a trading platform matches a maker and taker, it charges a small commission for both parties. The fee depends on the trade’s size and market maker program. Since makers add liquidity to the trading platform, they are charged a lower fee compared with takers, who only take liquidity out of the platform.
Market makers actively contribute to market liquidity by quoting prices and creating a market, while market takers accept existing market prices to execute trades. The interaction between makers and takers is essential for the healthy functioning of financial markets. They create a balance between those providing liquidity and those seeking to execute trades at the best available prices.