💎 Some exchanges, mainly cryptocurrency ones, charge lower commissions to limit order creators. Any order on the exchange has Maker (limit) orders and Taker (market) orders. And some exchanges take a commission only from the taker. Of course, exchanges will not operate at a disadvantage, and here they are also always in the black. The fact is that in any transaction, the maker’s transaction amount will be equal to the taker’s transaction amount. So the exchange will receive a commission in any case. But why should exchanges organize such an attraction of unprecedented generosity?
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💰 It is beneficial for exchanges that their users place limit orders. That is, so that they create liquidity in the order book. After all, many exchange clients use market orders or stop-limit orders. And the greater the liquidity in the glasses, the less slippage the taker will have. Simply put, there will be less loss when a stop loss is triggered or when jumping on the outgoing train through market stop orders.
A potential client will go to the exchange where there is more liquidity in the order book. And the exchanges again take commissions from these clients. And so, in order to motivate users to create liquidity with their limit orders, they give them a commission either less than that of the taker, or without any commission at all. That is, they create an incentive to create limit orders. This is how exchanges compete for clients with each other.
🔓 Low liquidity
As a rule, low liquidity is talked about as a minus for the exchange. But really it will depend on the strategy. If your strategy involves using only limit orders, then the low liquidity of the exchange turns into a plus for you. Because the lower the liquidity on the exchange, the more prices move there. But for a strategy that selects such shots with limit orders, this is only a plus. This makes it even more profitable and deals more often. Simply put, you can place more of these orders and the price shot will reach the order. Then the profit from the transaction will also be greater. After all, to stop the price you need more liquidity in the order book.
🤷♂️ Here’s a paradox: with the right approaches, low liquidity becomes a plus, not a minus, but it depends on what kind of strategy it is. If you trade a breakout strategy, the situation will change. This leads to an easy-to-understand conclusion:
1) Low liquidity is good when you trade limit orders 2) Low liquidity is bad when you trade market or stop orders
By the way, we trade exclusively with limit orders, precisely for the purpose of paying lower commissions.
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