Limit Orders
A limit order is very different than a market order. You are asking the market to order a trade only at a specific price. This is the difference between shouting “SELL ME SOME ETH” and “I’M WILLING TO BUY SOME ETH AT THIS PRICE”. Big difference.
When you issue a limit order properly you are adding to the book as either a bid or ask, you are making a new book entry… you are acting as a “maker”.
When you issue a limit order you are acting as a maker.
But wait, we said ‘properly’, what does this mean?
You cannot issue a limit order for a BUY with a limit price above the asking price, this won’t create a new book entry. Neither will a limit order for a SELL with a limit price below the asking price.
Let’s explain with an example: if the ‘book’ on sales of coconuts on a certain island on a given day has an asking price of $10, there are bids below that at $9.80, $9.75, … and there are asks above that at $10.50, $11.20, …
You issue a limit order to BUY a coconut at $15, above the asking price and into the ‘ask’ side of the book, the order is not accepted into the book. In many markets such an order would be treated as a MARKET order and filled as such, in others it would be rejected.
Similarly if you were to issue a limit order to SELL a coconut at $5, below the asking price and into the ‘bid’ side of the book, again it would not be accepted as a new entry into the book, it does not ‘fit’ the book as it stands.
In these scenarios your order would not be accepted as a market ‘maker’ because you have not added a proper entry to the book.
A market maker is one which adds an entry into the market book, a market taker is one who takes an existing entry from the market book.
Why does this matter? Oh it matters…
On some exchanges there are no commission fees for a maker order, and even the possibility of receiving a bonus for acting as one.
On some exchanges you can earn coin for acting as a maker.
On Binance.us (see screenshot above) a maker is charged the same commission fees by default, but at higher tiers this changes:
Notice that at tier ‘VIP6’ there are no maker fees while at ‘VIP0’ the maker fee is 0.1%, big difference.
On CoinMetro the situation [currently] is much more interesting, there are no commission fees for properly executed limit orders, for example:
And if you stake their coin (XCM) you can receive a “maker bonus” for each trade, starting at 30% of the taker fees.
Example: you trade USD 100 worth of ETH as a maker, the taker for that exchange pays 0.1% ($0.10) and you receive a maker bonus of 30% or $0.03.
Why is ‘can’ emphasized above? Is there a catch? There always is.
Your CoinMetro ‘maker bonus’ is only paid if the order is filled by a market order and thus the ‘taker’ pays their fee. If instead your order is filled by a proper limit order then on that exchange there is no fee and so no maker bonus. Of course you have no control over what type of order will fill yours.
You have no control over what type of order will fill your order.
This raises a bewildering proposition: if we can earn a bonus as a maker then can we simply earn profit by creating book entries all day long?
The simple answer is maybe, it is possible to fill a limit order and then sell it with another limit order and earn a maker bonus, however the sale price must be equal or higher than the purchase price and the orders must be filled by market orders (‘makers’) — therein lies the complication. Think about it…
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What have we learned?
- Limit orders have us acting as makers in a specified market, if their issuance results in a new entry in the exchange book
- Limit orders are less simple and may not execute
- Makers may not pay commission fees (it depends) and may receive a bonus
- Fees depend on a number of factors, important to understand these!
