Market Maker vs. Market Taker: Everything You Need to Know

Noah Fields
Noah Fields

Market Maker vs. Market Taker: Everything You Need to Know
Table of Contents
Table of Contents

If you've ever spent a little time investing, whether in the cryptocurrency market or stock market, then you might be familiar with the terms market makers and market takers. These are important participants in the trading process, so every investor should know about these basics.

How is the question of market maker vs. market taker relevant to the crypto investor? What are the advantages and fees involved? We answer these questions in this definitive guide, explaining all the differences and the roles of both in the market. It's not as complicated as you might think, as you will see shortly.

What Is a Market Maker vs. Market Taker in Crypto?

Market makers and market takers both work together to create a functioning trading market. The market maker is someone who creates the buy or sell order for execution, while the taker is the party that immediately buys or fills that order. The operations of market makers and takers are accounted for in an order book.

There needs to be enough liquidity in the market for buy and sell orders to be filled, and this is what market makers and takers do. Without liquidity, you wouldn't have enough available assets to meet the trade requirements of market participants.

Who Are Market Makers?

The market makers definition is as follows: a firm or individual that buys or sells assets for their own account. Another way to look at this is that market makers make the order books. Makers are responsible for providing liquidity to the market.

Market makers profit from the spread between the assets bid and profit price because they risk holding on to the asset while its price could decline. Market makers use all sorts of operations to try to gain a profit, including market maker signals. But some see the latter as more hocus pocus than anything.

What Is a Designated Market Maker (DMM)?

A designated market maker is a special kind of market maker who maintains price feeds and quotes for a specific asset. Think of them as market makers that build liquidity for a specific asset, facilitating the buying and selling of assets for that particular asset.

What Are Market Takers?

The market taker definition is as follows: someone who completes a market order by accepting it. Market takers are also known as liquidity takers. Another way to look at this is that market takers take from the order book.

Market takers are the average joes and janes who trade on the market and buy an asset at the asking price. These investors are hoping that the new asset will add to their portfolio's value in the short or long term.

order books
Most centralized exchanges like Binance (and a few decentralized exchanges like AtomicDEX) use order books to connect market makers and market takers.

How Do Market Makers Trade?

Market makers make their profits by charging a spread on the buy and sell price of an asset. The takers pay the asking price for an asset, which is usually higher than the market price. Then, the trade is executed at a bid price. The difference between the market price and the bid-ask price is the spread, which is the profit that the market maker takes in.

There are two types of market maker trades: agency trades and principal trades. We won't go into detail about these here. However, the broad explanation is that agency trades involve a maker finding a counterparty to the customer's trade, while principal trades complete a trade using their own inventory.

What Are Market Maker and Market Taker Fees?

Market makers and takers are both charged fees on a trading platform. However, market makers are charged less because they provide liquidity. Conversely, market takers are charged more because they are taking away liquidity.

However, bear in mind that this can vary depending on the exchange. Some exchanges even exempt market makers from fees to encourage liquidity provision, as it is necessary for the functionality of the exchange.

Advantages of Market Makers and Takers

As mentioned, market makers and takers play a major role in keeping the liquidity of assets alive. This is vital to keeping the price of an asset steady, or at least under control. If there is no liquidity, then there is no way of buying or selling an asset, which is detrimental to the asset's value. Market makers and takers also help keep the asset free from market manipulation — at least to a degree.

Market Makers vs. Market Takers

There is no competition between market makers and market takers. They both need each other to work in what is a symbiotic system. They have their own roles to play, and without either, the system would simply not work.

If you're wondering how to become a market maker, the process is actually quite easy. If you place a limit order on a centralized crypto exchange, you are making the market.

There is also the more recent development of automated market makers (AMMs), which are featured prominently in the decentralized finance (DeFi) market in the form of decentralized exchanges (DEXs).

The Uniswap exchange is a particularly well-known AMM model that conducts trades directly between peers, maintaining the price of an asset through a mathematical formula. This formula ensures that the price remains as constant as possible.

Of course, AMMs come with their own risks, one of which is impermanent loss. This is out of the scope of this guide, but know that each system has its own set of pros and cons.

automated market maker (AMM)
Uniswap uses automated market maker (AMM) technology for tapping into crypto liquidity.

Market Maker vs. Taker - Which One Are You?

We hope you've understood the differences between market makers and market takers with this guide. The model is important to understanding how liquidity and trading works and, in turn, how prices are impacted. Much of the market operates on this model, as do other asset classes, so it is well worth knowing.

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