On any kind of exchange (whether Forex, stocks, or cryptocurrency), sellers are matched with buyers. Without these meeting points, you’d need to advertise your offers to trade Bitcoin for Ethereum on social media and hope that someone is interested.
Let’s talk about liquidity
An ounce of gold is a very liquid asset because it can easily be traded for cash in a short period of time. A ten-meter tall statue of the Binance CEO riding a bull, unfortunately, is a highly illiquid asset. Though it would look great in anyone’s front garden, the reality is that not everyone would be interested in such an item.
Conversely, an illiquid market shows none of these properties. If you want to sell an asset, you’ll have trouble selling it at a fair price because there isn’t as much demand. As a consequence, illiquid markets often have a much higher bid-ask spread.
Okay! Now that we’ve covered liquidity, it’s time to move onto the makers and takers.
Market makers and market takers
As mentioned, the traders that flock to an exchange act as either makers or takers.
Maker (Post Only) Order like the one described requires that you announce your intentions ahead of time by adding them to the order book. You’re a maker because you’ve “made” the market, in a sense. The exchange is like a grocery store that charges a fee to individuals to put goods on the shelves, and you’re the person adding your own inventory.
It’s common for big traders and institutions (like those specializing in high-frequency trading) to take on the role of market makers. Alternatively, small traders can become makers, simply by placing certain order types that aren’t executed immediately.
Please note that using a limit order does not guarantee that your order will be a maker order. If you want to make sure the order goes into the order book before it is filled, please select “Post only” when placing your order (currently only available on the web version and desk version).
If we keep the store analogy going, then surely you’re putting your inventory on the shelves for someone to come and purchase it. That someone is the taker. Instead of taking tins of beans from the store, though, they’re eating into the liquidity you provide.
If you’ve ever placed a market order on Binance or another cryptocurrency exchange to trade, say then you’ve acted as a taker. But note that you can also be a taker using limit orders. The thing is: you are a taker whenever you fill someone else's order.
Many exchanges generate a considerable portion of their revenue by charging trading fees for matching users. This means that any time you create an order and it's executed, you pay a small amount in fees. But that amount differs from one exchange to another, and it may also vary depending on your trading size and role.
For exchanges that use a maker-taker model, the makers are vital to the platform’s attractiveness as a trading venue. Generally, exchanges reward makers with lower fees as they provide liquidity. In contrast, takers make use of this liquidity to easily buy or sell assets. But they often pay a higher fee for this.