Market Maker, Market Taker

In cryptocurrency trading, a market maker is a participant who provides liquidity to a market by placing limit orders on the order book. These limit orders are typically placed on both the buy and sell sides of the order book, with the intention of profiting from the spread between the bid and ask prices. Market makers facilitate trading by ensuring there are always willing buyers and sellers in the market.

On the other hand, a market taker is a participant who consumes liquidity from the order book by placing market orders that are executed immediately at the best available price. Market takers do not contribute liquidity to the market; instead, they take liquidity from existing orders placed by market makers.

Example:

Let's say there's a cryptocurrency exchange with a market for Bitcoin (BTC) and Ethereum (ETH).

- Market Maker: Alice decides to become a market maker on the exchange. She places limit orders to buy BTC at $50,000 and to sell BTC at $50,100. She also places limit orders to buy ETH at $2,000 and to sell ETH at $2,010. These orders add liquidity to the order book.

- Market Taker: Bob wants to buy 1 BTC immediately, so he places a market order. His order is matched with Alice's sell order at $50,100, and the trade is executed. Bob is a market taker because he took liquidity from Alice's existing sell order.

Cases:

1. High Liquidity: In markets with high liquidity, there are usually many market makers providing liquidity by placing orders on the order book. This results in tight bid-ask spreads and efficient price discovery.
2. Low Liquidity: In markets with low liquidity, there may be fewer market makers, leading to wider bid-ask spreads and increased price volatility. Market takers may find it harder to execute large orders without significantly impacting the market price.
3. Arbitrage Opportunities: Market makers often engage in arbitrage strategies by simultaneously buying and selling the same asset on different exchanges to profit from price discrepancies. Market takers may also exploit arbitrage opportunities, but they have to pay fees for executing market orders.

In summary, market makers contribute liquidity to the market by placing limit orders, while market takers consume liquidity by placing market orders. Both play crucial roles in ensuring smooth and efficient trading in cryptocurrency markets.