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Author Topic: Maximizing Bitcoin Liquidity Through the Make-or-Take Model  (Read 910 times)
is4tomj
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June 24, 2012, 06:03:08 AM
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Hi, below is a link to a blog post on maximizing bitcoin liquidity on bitcoin exchanges through the make-or-take model.

http://blog.bitcointitan.com/post/25759461251/maximizing-liquidity-through-the-make-or-take-model

http://BitcoinTitan.com - Visualizations of the Bitcoin Markets and Exchanges
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June 24, 2012, 11:45:25 AM
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Hi, below is a link to a blog post on maximizing bitcoin liquidity on bitcoin exchanges through the make-or-take model.

http://blog.bitcointitan.com/post/25759461251/maximizing-liquidity-through-the-make-or-take-model
Several exchanges offer a make-take price differential. Intersango,
bitfloor and hellobitcoin come to mind.

I feel that the differential they choose is somewhat
arbitrary.

I have always felt that the make-take commission differential should
be no greater than the exchange's least count divided by the price of
btcusd.  And, all exchanges violate this condition.

Why do I belive in this condition?  For if this condition is not
met, then as a trader, it sometimes is cheaper for you to bid at
6.51 than it is to bid at 6.50.

Equivalently, here's, I believe, the problem from the exchange's
perspective if you violate this condition. The make-take difference may help you achieve a tight
spread and thus, a good price-discovery, but both are illusory.  For,
imagine that the true bid-ask frontiers should lie at
6.51-6.52. Imagine that your exchange is currently locked in at
6.50-6.51. Your exchange has seemingly discovered a price with a tight
spread. Is this the correct price? Even if traders are convinced that
the correct frontier should be 6.51-6.52, there is a *negative*
incentive for a trader to try to correct that imbalance.

 

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Meni Rosenfeld
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June 24, 2012, 12:00:25 PM
 #3

The make-or-take model doesn't improve liquidity, it just gives the illusion of it.

See for example this comment where I try to explain the equivalence.

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is4tomj
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June 24, 2012, 01:19:27 PM
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Whether the spread is the "right" spread as you call it doesn't have anything to do with what is the "fair" or "right" spread.  The "right" spread has to do with the efficient market hypothesis.  If you believe that markets are efficient then you believe that the right price is the last current market price. If you do not believe markets are perfectly efficient (which most people do not) then prices will not be the "right" prices, but will correct eventually as people take advantage of the arbitrage opportunity.

Intersango only offers a discount on commission to to market markers but that is still a penalty, market makers should be rewarded, and make money for each trade.

hellobitcoin says they employ the make-or-take model, but in red words below their claim to use the make-or-take model, they state that they actually charge market makers 0.15% which is not the make-or-take model.




Hi, below is a link to a blog post on maximizing bitcoin liquidity on bitcoin exchanges through the make-or-take model.

http://blog.bitcointitan.com/post/25759461251/maximizing-liquidity-through-the-make-or-take-model
Several exchanges offer a make-take price differential. Intersango,
bitfloor and hellobitcoin come to mind.

I feel that the differential they choose is somewhat
arbitrary.

I have always felt that the make-take commission differential should
be no greater than the exchange's least count divided by the price of
btcusd.  And, all exchanges violate this condition.

Why do I belive in this condition?  For if this condition is not
met, then as a trader, it sometimes is cheaper for you to bid at
6.51 than it is to bid at 6.50.

Equivalently, here's, I believe, the problem from the exchange's
perspective if you violate this condition. The make-take difference may help you achieve a tight
spread and thus, a good price-discovery, but both are illusory.  For,
imagine that the true bid-ask frontiers should lie at
6.51-6.52. Imagine that your exchange is currently locked in at
6.50-6.51. Your exchange has seemingly discovered a price with a tight
spread. Is this the correct price? Even if traders are convinced that
the correct frontier should be 6.51-6.52, there is a *negative*
incentive for a trader to try to correct that imbalance.

 

http://BitcoinTitan.com - Visualizations of the Bitcoin Markets and Exchanges
Meni Rosenfeld
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June 24, 2012, 01:30:48 PM
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Whether the spread is the "right" spread as you call it doesn't have anything to do with what is the "fair" or "right" spread.
deego talked about a tight spread.

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is4tomj
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June 24, 2012, 01:40:30 PM
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No, he agrees that the make-or-take model provides a tight spread. deego's issue was whether the spread was the "true" spread, but I changed that to "right" spread.  Sorry if that was confusing.

Whether the spread is the "right" spread as you call it doesn't have anything to do with what is the "fair" or "right" spread.
deego talked about a tight spread.

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MoneyIsDebt
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June 24, 2012, 03:16:23 PM
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What happens if there are no fees on transactions? (Just on deposits / withdrawals or some other mechanism to keep the exchange operating)

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deego
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June 24, 2012, 07:09:15 PM
 #8

 If you believe that markets are efficient then you believe that the right price is the last current market price. I

That statement needs two corrections:

The right price is the place (1) where demand meets supply - it is the place where the bid- and ask- frontiers meet rather than the last price. It could have been hours with no trade, and the bid-ask frontier could have moved by 20%. No one in their right mind would trade at the actual final price in that case. If you do, I would love to be your counter-party. (2) The right price is the place where *global* demand meets *global* supply.

My example illustrated that if the *local* bid-ask frontier at an exchange differed from the *global* frontier (which I called the true price), there is no incentive (rather, a negative incentive) for a trader to correct that imbalance when the make-take difference exceeds certain thresholds.


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deego
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June 24, 2012, 07:28:38 PM
 #9

The make-or-take model doesn't improve liquidity, it just gives the illusion of it.

See for example this comment where I try to explain the equivalence.


Still mulling over it, but an excellent post.

Your point being that the make-take difference is somewhat illusory.

(1) From the exchange's perspective, every trade comprises a total fee
of make+take.

(2) Similarly, from a trader's perspective, it may not look like it, but he really has to take into
account the sum of make + take. For example, a maker has to not only
think of his own fee, but he also has to make the trade attractive to
a taker. So he has to think about the take- fee as well.



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