
There are two
types of traders in any thriving marketplace – market makers and market takers.
You might be familiar with these terms if you have spent a little time
investing in the market. Every investor should know about their basics because
they are important participants in the trading process.
Who Are Market
Makers?
A market maker
is an individual or firm that sells or buys assets for its account. They make
the order books and are responsible for providing liquidity to the market.
Market makers make a profit from the spread between profit price and assets bid
since they take a chance by holding onto the asset even though its price might
drop.
Also, they make
use of different operations to try to gain profit including market maker
signals a designated market maker (DMM). A DMM is a special kind of market
maker who maintains price quotes and feeds for a specific asset. They can be
likened to market makers that create liquidity for a specific asset, facilitating
the purchase and sale of that specific asset.
Who Are Market
Takers?
A market taker
is an individual or firm that completes a market order by accepting it. They
are also known as liquidity takers. To look at market takers another way, they
are the ones who take from the order book.
Market takers
are regular people who trade on the market and purchase an asset for the asking
price. They are investors who hope that the new asset will add to the value of
their portfolio in the long or short term.
What Are Market
Makers Vs Market Takers in Crypto?
Market makers
and market takers are not in competition with one another. To work in what is
known as a symbiotic system, they both need one another. Both collaborate to
establish a functioning crypto trading market.
Someone who creates
the sell and buys order for execution is the market maker, while the party that
immediately fills or buys that order is the market taker. Their operations are
accounted for in an order book.
For the sell
and buy orders to be filled, there needs to be enough liquidity in the market. You
wouldn't have enough assets available without liquidity to satisfy market
participants' trade requirements.
Furthermore, automated market makers (AMMs), a more
recent development that prominently features in the decentralized finance
(DeFi) market in the form of decentralized exchanges (DEXs), have been created.
An AMM model that is particularly well-known for conducting trades directly between
peers and maintaining an asset's price through a mathematical formula is the
Uniswap exchange.
By using this
formula, the price is guaranteed to be as stable as possible. Impermanent loss
is one of the risks that AMMs carry. Nevertheless, you must be aware that every
system has its own unique set of benefits and drawbacks.
Watch this video on how to
trade!
What Are
Market Maker and Market Taker Fees?
Both market
makers and market takers are charged fees on a trading platform. However,
because they offer liquidity, market makers are charged less. In contrast,
market takers take away liquidity and are charged more. Still, you must keep in
mind that this can change depending on the exchange.
Since liquidity
provision is necessary for the operation of the exchange, some exchanges even
exempt fees for market makers.
Conclusion
Both market
makers and market takers are important models in understanding how trading and
liquidity work, and how they impact prices. Different asset classes work on
this model including the crypto market. Knowing the difference between both
will help you know the role you play in trading.
DISCLOSURE
Comments here are not of the author's opinion. Users are responsible for their comments.