Market makers and takers, who are they and how influential are they towards market liquidity?
In this article, we will be exploring these topics and answering your questions.
What is liquidity?
Liquidity refers to the efficiency of trading assets into cash and the ability to quickly trade assets as well. It is worth noting that cash is the most liquid asset as it can be traded into any other asset in a short matter of time.
The reason behind cash’s high liquidity is the fact that it acts as a medium of exchange, while also storing value in a portable way, as well as being able to be divided into smaller units.
Why is liquidity important?
If a market is not liquid, assets would be difficult to trade. When buying or selling, it is undeniably more satisfying to complete transactions immediately. Much like when property that is for rent, if in high demand, an interested renter would be found quickly.
The same can be found in a crypto market. A highly liquid market would influence investors immensely as, nowadays, cryptocurrency has become one of the most volatile assets in the crypto, if a certain asset’s market volume is low, then there would not be enough for traders that desire the asset at the same price point.
People that are responsible for supply liquidity in markets are referred to as market makers and market takers.
What are market makers?
Market makers are those who make market orders in the form of bids and asks to supply liquidity. They can be individual traders or an organization. When a limit or stop-limit order is created, it would be directly added to the market’s order book system.
A clear visual representation is if Mr. A creates an order for 2 Bitcoins at the price of 1,800,000, the requested order would be immediately redirected to the order book and would become a successful order when it is matched.
What are market takers?
If a market maker creates an order, a taker would be required to create an order of the opposite kind to make sure the order which has been placed into the order book is matched. The transaction can be in the forms of both market and limit orders.
For example, after Ms. B has created a buy market order for 2 BTC, it can be immediately matched, meaning the order would be erased from the order book.
In short, liquidity refers to the ability to quickly and efficiently trade assets into cash, making it an integral part of markets. If a market has low liquidity, it would consequently lead to slow transactions.
Market makers are those responsible for increasing the liquidity of the market by creating sell-buy orders in the order book for market takers to correspondingly respond to. If a market has an adequate amount of market makers and takers, its liquidity would be increasingly elevated.