Maker vs Taker fees

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Nearly all cryptocurrency exchanges have higher taker fees than maker fees, but the spread can vary a lot.  On one extreme, there's BitMEX, which charges 0.075% on takes but pays a 0.025% rebate on provides.  Binance, on the other hand, has a tiered fee structure with taker fees only slightly higher than maker fees.  Which is better?

 

In many cases there isn't a big difference.  Say that some exchange X decides to charge maker plus taker fees of 0.10%.  Here are two possible fee structures for X:

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In both cases the total fees charged are 0.10% per trade.  Let's say that there is some illiquid orderbook on the exchange--maybe it's a DASH/USD orderbook.

 

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These orderbooks are equivalent to each other.  To see that, imagine lifting the offer for 1 DASH.  In option A you pay $100.80, plus an additional 0.06%*100.80 in fees, for a total of about $100.86.  In option B, you'd pay $100.71 + 0.15%*100.71, again roughly $100.86.  Similarly the amount you'd receive for selling DASH would be the same.

And if you look at it from the perspective of the provider, things are also the same.  In option A they'd be selling DASH for $100.80 and paying another 0.04% in fees, netting $100.76; in option B they'd receive $100.71 plus a 0.05% rebate, getting them the same $100.76.

So, if you keep total fees charged the same, changing the spread between maker and taker fees is the same as widening or tightening the orderbook display.  Market makers will just shift their provides to compensate, and everyone will end up in the same place as before.

 

So does it ever matter whether you have maker rebates or maker fees?  Well, yes, there is one case.  Say that instead of trading DASH/USD, you were trading a BTC/USD perpetual future.  In Option A, the orderbook might look like this:

 

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So, we could use the same trick as before--and come up with the equivalent Option B orderbook, which would look like....

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But now we see the problem--the Option B orderbook is invalid, because the best bid is higher than the best offer!  There is no way to translate this Option A orderbook into Option B's world.  In fact, given that there are 0.15% taker fees in Option B, it's impossible to have the effective bid-ask spread be less than 0.30%--meaning it's impossible to have an orderbook where the price you'd pay for lifting the offer is less than 30bps higher than the price you'd pay for hitting the bid.

There's no limit on how wide an orderbook can be, so every Option B orderbook can be translated into an Option A equivalent.  But the reverse isn't true.  So having too large of a maker-taker spread makes it impossible for the market to have a tight effective bid-ask spread once you take fees into account.

In general this means that you shouldn't have maker rebates be larger than the amount of uncertainty there is in pricing an asset.  Given that BTC markets with zero maker fees/rebates are generally around 0.01% wide, any amount of maker rebates in BTC/USD markets will make them effectively too wide.

FTX does want to incentivize people to provide liquidity--doing so means taking the risk that prices will move against your order.  But we want to make sure that we don't make markets artificially wide, which is why our maker - taker spread is significantly lower than many of our competitors.

 

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