Effects of Maker-Taker Pricing Models on Global Bitcoin Markets
Underpinning global exchanges and their bottom line is the maker-taker fee model. At the crux of this fee structure is rewarding liquidity providers, the maker, with lower fees or rebates while charging a higher fee on the taker – the investors who ‘take’ liquidity away from the exchange instantly.
The maker-taker model was introduced into equity markets in 1997 and has been the prevailing fee structure since, based on the economic theory that it would tighten the gap between bid and ask prices and increase liquidity on an exchange.
However, there has been concern surrounding maker fee rebates. The Chief Investment Officer of Yale University called rebates “kickbacks.” The Financial Times posits that the maker-taker model is “one of the most controversial elements of the US equity market.” The Chief Strategy Officer at Bloomberg refers to it as a “prisoner’s dilemma.”
Retail brokerages such as Charles Schwab, Scottrade, TD Ameritrade, Fidelity, E* Trade, Edward Jones, and Morgan Stanley were under investigation for potentially exploiting the rebate system against their clients.
In a move to protect self-interest, the New York Stock Exchange (NYSE) and Nasdaq began court proceedings by submitting two 400-page petitions against the US Securities and Exchange Commission (SEC) to block a pilot program that could end exchange rebates.
But why all the controversy, and how does this affect cryptocurrency markets? Zubr takes a look behind the economic theory, incentives, and the real effects of asymmetric fees on exchanges.
Key Takeaways
- While maker rebates initially increase liquidity, the benefits diminish as more high-frequency traders compete against each other, reducing profitability and order book size, leading to less effective markets.
- Price discovery becomes problematic as liquidity providers account for their net trade after rebates. This skews trading spreads, and the real value across exchanges differs primarily due to fee structures.
- Maker rebates resemble marketing tactics employed by exchanges to attract liquidity from competitors. The net revenue earned by exchanges remains the same, as takers bear the higher trading costs.
- Maker rebates compel passive investors to trade more aggressively to access liquidity as spreads are artificially narrowed.
- The US Securities & Exchange Commission has questioned the economic theory and incentives of maker rebates and is piloting a program that could potentially end the model. This would lead to a different future for exchanges and trading, providing better protection for investors who ‘take’ liquidity.
The Hypothesis
The first trading system to introduce maker-taker rebates was Island ECN in 1997. The economic theory behind the incentive of rebates was to bring liquidity to exchanges and reward makers for patiently waiting for orders to fill.
This marked a departure from the traditional fee model where both buyers and sellers paid a small fee. The change in structure had significant implications for exchanges and markets worldwide.
Traders and brokers became more inclined to trade on exchanges offering rebates, prompting many exchanges to adopt the rebate model to stay competitive.
However, as more embraced the new fee structure, new problems emerged. Regulators had to intervene and cap maker-taker incentives as exchanges began to increase rebates and hike taker fees just a year into this new paradigm. Fees on exchanges between maker and taker diverged significantly as exchanges competed for liquidity.
“Maker-taker models seem more attractive to makers and reduce apparent spreads, so it’s better marketing to display things that way, much like displaying prices with tax not included.” — Vitalik Buterin, co-founder of Ethereum.
Accounting for Reality
The primary driver behind the maker-taker fee was the assumption that incentives for makers to post liquidity would lead to tighter bid-ask spreads. By every observable metric, this assumption has proven true.
However, as traders managed their strategies across exchanges, it became evident to researchers and regulators that the narrow spreads were an artificial accounting exercise. Liquidity providers ultimately account for their final payout from a trade in direct relation to their rebate.
A joint research paper by USC, Georgetown, and Carnegie Mellon concluded that “maker-taker pricing has not changed net spreads but has decreased quoted spreads.”
A study by the University of Southern California similarly concluded that by “narrowing quoted bid-ask spreads, maker-taker pricing has introduced a transparency problem into the markets. Quoted prices do not reflect net prices.”
The SEC found that “in the absence of maker-taker fees, the quoted prices would reflect more closely actual net economic prices. Consequently, if quoted prices more closely reflected actual net prices, market participants may be more willing to reach across the market and take liquidity at the quoted price rather than seek to avoid an execution as a taker in a maker-taker environment and consequently lock the market.”
Exchange Balance at the Expense of Takers
Asymmetric fees may seem to create a fair market structure that rewards liquidity providers. However, this is not at the expense of the exchange but at the cost of the investors who are takers, burdened with higher fees. A letter to the SEC by RBC Capital Markets states that the maker-taker model “may increasingly disadvantage long-term investors who are interested in fundamental value.”
This fee dynamic forces passive market participants to trade more aggressively to access liquidity that is “often fleeting” under the maker-taker model. This leads to challenges in achieving accurate pricing and actual volume across fragmented markets, where the variation in fees is not reflected in quoted prices.
This article now presents a cohesive examination of the effects of maker-taker pricing models on the global Bitcoin market, discussing key takeaways, hypotheses, and the implications for traders and investors. Let me know if you need any further changes or additions!
4o mini
| Spot Exchange | Fee Structure | Maker | Taker |
|---|---|---|---|
| Coinbase | Tier/Discount | 0-0.5 | 0.04-0.5 |
| Binance | Tier/Discount | 0.02-0.01 | 0.04-0.01 |
| Bitstamp | Tier/Flat | 0-0.5 | 0-0.5 |
| Bitfinex | Tier/Discount | 0-0.1 | 0.055-0.2 |
| Derivatives Exchange | Fee Structure | Maker % | Taker % |
|---|---|---|---|
| Bitmex | Rebate | -0.025 | 0.075 |
| Deribit | Rebate | -0.025 | 0.075 |
| FTX | Tier/Discount | 0.01-0.02 | 0.04-0.07 |
| ZUBR | Flat-Fee | 0.01 | 0.01 |
| Huobi DM | Flat/Discount | 0.02 | 0.03 |
| OKEx | Tier/Discount/VIP Rebate | -0.03 | 0.025-0.05 |
| Binance Futures | Tier/Discount | 0-0.02 | 0.017-0.04 |