After looking into how a bitcoin wallet works, I felt that it was time to take the exchanges apart. But I kept coming up against the phrase “maker-taker trading”. You probably know what it is, but I didn’t, so I hit the search bar and this is what I found:
Back when I worked in the financial markets, exchanges were places where traders bought at one price and sold at another and hopefully made money on the difference. The traders paid a fee for the privilege, but customer orders (end buyers such as private individuals or investment funds) didn’t, and jumped to the head of the queue.
Things have changed. The advent of high frequency trading and the proliferation of illiquid securities and assets led to the need to increase trading liquidity in certain markets.
“Maker taker” trading was designed to incentivize market makers (those who post possible trades) to provide liquidity, so that market takers (those that accept those trades) would have an assurance that their orders would be met. Market makers are those who are willing to buy or sell at a certain price. They publish their willingness. Market takers are those who actively want to buy or sell. They go looking for a suitable published proposed trade, and accept it. Market makers provide the gasoline for the market. Market takers step on the pedal so that the gasoline is used up.
Not all bitcoin exchanges have adopted this trading system, but it seems that most of the large ones have, including Kraken, Coinbase, Coinfloor, and itBit. In fact, itBit charges no maker fees at all, and Gemini, Coincheck and BTCC offer to pay (= a net rebate) dealers for posting bids and offers.
In the securities industry, maker-taker trading is coming under fire for allegedly distorting market pricing, and for possibly creating conflicts of interest. Most stock exchanges require brokers to route their clients’ trades to the best available price. Under the maker-taker system, market “makers” are more likely to take their bids and offers to the exchange that gives the best rebate, rather than the best price. Plus, effectively “paying” people to trade goes against the free market philosophy underpinning most official trading forums. And the model can lead to different settling prices than on a fee-based exchange.
Yet it is unlikely that this unease will spill over into bitcoin exchanges just yet. At the moment, liquidity seems to be a priority, and the maker-taker system encourages liquidity by incentivizing the posting of trades. As liquidity increases, it’s likely that the maker-taker model will come under more scrutiny. But by then it’s likely that trading technology will have advanced to the point that exchanges and traders need to operate under different rules anyway.