Why are exchange fees so high and charged by %?

[_mr_e]

I don't understand why an exchange like cavirtex needs to charge such a high fee per trade, and why that fee needs to be charged as a % of the transaction? Even Gox charges a %. I am aware there are costs in running an exchange but these exchanges should be mostly automated by machines.... So why does it cost so much more to facilitate a $1000 trade vs a $1 trade? It's just a computer processing a different number, there is no need for it to cost so much extra.

It seems to me like there should be room here for people to build an exchange using waaay lower fees, why has this not happened yet? One of the points we always use to sell bitcoin is the "no transaction fees" but buying and selling your coins comes at such a high fee so it really doesn't matter - unless you stay within the btc economy of course. But for instance trying to send money to a relative across seas would still come at an exceptional fee.

I really think this problem needs to be solved in order to help bring btc to the masses but I just don't understand why this problem hasn't already been solved on the free market.

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[Picklee]

I don't understand why an exchange like cavirtex needs to charge such a high fee per trade, and why that fee needs to be charged as a % of the transaction? Even Gox charges a %. I am aware there are costs in running an exchange but these exchanges should be mostly automated by machines.... So why does it cost so much more to facilitate a $1000 trade vs a $1 trade? It's just a computer processing a different number, there is no need for it to cost so much extra.

To be fair, it is not only computer processing. Legitimate exchanges like VirtEx and Mt.Gox still have to operate within legal frameworks depending on where the customer is. And remember that big exchanges are the glue between the bit coin network and the fiat markets, which are heavily regulated. I know that Virtex spends a lot of their money on legal and consulting fees.

As far as fees go, the proportional fee structure makes it cheaper for smaller trades to occur. On other markets, like TSX or NYSE, brokers generally charge flat fees between $4-$10 which is better for large volume trades. VirtEx fees are insane; though, I still profit from using their services.

[WiW]

Why not look at it the other way around? Why is a $1 trade so much cheaper than a $1000 trade? It's just the same operation on a different number.

Perhaps it's because that if you paid a $10 fee for a $1 trades you wouldn't make $1 trades?

[notme]

A larger order will likely have to interact with more orders to be filled completely.  Liquidity has long been a problem in bitcoin, although it is dramatically better these days.

[AllYourBase]

I don't understand why an exchange like cavirtex needs to charge such a high fee per trade, and why that fee needs to be charged as a % of the transaction? Even Gox charges a %. I am aware there are costs in running an exchange but these exchanges should be mostly automated by machines.... So why does it cost so much more to facilitate a $1000 trade vs a $1 trade? It's just a computer processing a different number, there is no need for it to cost so much extra.

It seems to me like there should be room here for people to build an exchange using waaay lower fees, why has this not happened yet? One of the points we always use to sell bitcoin is the "no transaction fees" but buying and selling your coins comes at such a high fee so it really doesn't matter - unless you stay within the btc economy of course. But for instance trying to send money to a relative across seas would still come at an exceptional fee.

I really think this problem needs to be solved in order to help bring btc to the masses but I just don't understand why this problem hasn't already been solved on the free market.

Risk.  Handling $1million requires much higher security, makes you a bigger target for hacking, etc. than handling $1.

[Adrian-x]

I don't understand why an exchange like cavirtex needs to charge such a high fee per trade, and why that fee needs to be charged as a % of the transaction?

Cavertex used to be competitive with the likes of MtGox, it all changed with the decision to have an IPO, they needed profit to justify there value.

It is a small outfit cutting through red tape in Canada and as such has to justify the fees.


As the market growand and with competition they will change, there fee tears are unsustainable with the Bitcoin deflationary model.

[MonkeyBear68]

I use CaVirtEx for all my Bitcoin trading. I initially learned about Bitcoins in August 2011. I recently bought shares in the CaVirtEx IPO through Havelock Investments. However, I own less than 1%.

I decided to invest in VirtEx because I am a C++ programmer for another company (not BTC related) and I know what it takes to get a site to the point that Virtex is. Their fees are volume based, so the more you trade the lower your fee will be. For smaller volume day trading the fees will eat into your profits a bit. I believe that Bitcoin will be around for the long haul, so the fees were not as much a factor for me. I do not day trade.

Another thing to keep in mind is that Canada is a much smaller market than the US. Mt Gox has 50 times the volume of Virtex(BitcoinCharts), but still has the same costs in developing, marketing, administering the site and remaining compliant for Canadian AML laws. This means Virtex has a smaller base to make the business viable and therefore higher fees are required.

Initially when I learned about Bitcoin I researched about using Mt Gox and Virtex. I found it is MUCH harder for me (as a Canadian) to get money into Mt Gox. Thus I decided to become a verified user on Virtex. I have had nothing but positive customer experiences with Virtex since the beginning and that is important to me for my investments and my hard-earned money.

Percentage fees are the way many businesses operate. Does it require a waiter any more effort to bring a plate of pasta VS a plate with fillet mignon? The cost of the tip is related to the price of the food, so the waiter serving the mignon gets a higher amount of tip. Most investment houses also charge fees based on a percentage of money invested.

If you think that the fees are too high, then that is an incentive to start a new exchange and charge based on a flat rate. Be prepared for hundreds of hours in programming, design and implementation. Your system cannot crash and lose transactions. Once you realize all the effort that goes into such a website, I think you will want to be adequately compensated for your efforts. Unfortunately in Canada because of the smaller market that means somewhat higher fees.

As a customer I do not mind paying for good service and I also like to support Canadian companies when possible. I have also learned over the years that saving a few bucks is sometimes not worth the hassle of dealing with inadequacies afterwards. You get what you pay for. 

[RationalSpeculator]

Good point OP. In Europe we have bitcoin-24.com, no fees at all! No fees for trading bitcoins whatsoever (also not for depositing/withdrawing btc ofcourse), as well as ridiculous low fees for depositing and withdrawing fiat, 1.5€ per transaction, independent of amount!

They make money with quick deposits/withdrawals of fiat as well as donations. Bitcoin-24 has now become the biggest btc/euro exchange, surpassing since recently MtgoxEUR!

Start one yourself and beat mtgox!

[Nagato]

Ill give you an answer from the perspective of an exchange operator.

I fully agree with you that the cost of processing a trade is the same whether it is $1 or $1mil(after taking into account all the fixed costs like development/hosting/security/etc..) and i used to wonder why exchanges charged by % as well.

But the reason exchanges charge by % is because of liquidity. Exchanges live and die by liquidity. Unlike payment processors/Bitcoin which shift money from A to B and a fixed cost model can be rightly argued for, exchanges need a counterparty to any trade. If we were to use a fixed cost model, a single big buyer could wipe out a large chunk of buy or sell orders for 1 small fee. Now, you are left with a shallow/empty order book which detracts people from trading on your exchange and drives away potential new users. This is also why some exchanges offer liquidity rebates or discounts to attract pending orders.

Given the importance of liquidity, first mover advantage is very very high and that is why it is going to be very difficult for MtGox to get dethroned. Also given the fixed costs for running an exchange, the percentage of revenue used to cover costs is very high for a new exchange, whereas it is insignificant for a larger exchange and this further inhibits new entrants.

And also, as others have mentioned, the cost of running an exchange is not as low as it first seems. Running costs include monitoring for issues, server uptime, security attacks, backups, improvement of backend, customer support(the amount of stupid questions and unreasonable demands is just astounding), moving of funds to cold storage and for my case, manually processing deposits/withdraws which is just painful and tedious with the current banking system. To sign up for access to an automated option, the banks want to charge outrageous fees plus fees per transaction.

Not to forget the constant worry of getting hacked, government shutting you down, user disputes.

[RationalSpeculator]

Ill give you an answer from the perspective of an exchange operator.

I fully agree with you that the cost of processing a trade is the same whether it is $1 or $1mil(after taking into account all the fixed costs like development/hosting/security/etc..) and i used to wonder why exchanges charged by % as well.

But the reason exchanges charge by % is because ...

I don't mind you make good money at mtgox. Happy for you.

But it looks like you give reasons why those % fees are needed.

But if that is really true, howcome bitcoin-24.com does not need to charge these % trading fees? (and trading seems to go smoothly, surpassing mtgoxeur in volume)

[Nagato]

Why do open source projects exist when developers have to pour in 1000s of hours with nothing in return?
Why do charity?

For BTC24,
because he does not mind spending money and time to run an exchange?

Maybe he has a large stash of bitcoins already and would benefit more from promoting Bitcoin and the consequent price rise of having a 0 fee exchange than collecting a few btc in fees for a small exchange.
Or he plans to get the liquidity onto the exchange for now and then transition to charging fees later on.

[CliffordM]

% charges are the global standard, although for retail there are often minimum charges too.

It is also quite common to have "per-message" charges to stop people from constantly posting / changing / deleting orders.

The Beauty of Bitcoin is that it's open, and the market will ultimately dictate how and what commissions are fair.