Last week, we learnt market makers are welcomed by exchanges because they add liquidity to the market. It is a fact that many exchanges including AAX use a maker-taker fee structure to reward market makers by charging them lower fees.
Many traders are aware of such a fee structure but do not know under what circumstances they are considered a maker or a taker.
Who are makers and takers?
To begin with, do not confuse it with buyers and sellers. Simply put, makers add liquidity to the order book by placing orders onto it and waiting for them to be executed later. Takers are users who want to immediately execute orders, taking away orders from the order book, reducing its liquidity.
Now, let’s look at the different approach makers and takers have towards trading.
Market makers like to play it slow
Market makers add liquidity by placing limit orders. They enter buy and sell orders and wait for their bid or ask to be executed by another trader. In return for their patience and help with adding liquidity, exchanges reward them with a lower fee or even a rebate.
Market takers want things done immediately
On the other hand, market takers immediately execute trades on existing orders rather than waiting for their price to be met by other traders. They prefer to trade immediately , eliminating volatility concerns. By executing orders instantly, they take away liquidity, and as a result some exchanges tend to charge them higher fees.
To find out more about AAX or to pre-register please visit www.aax.com.