Maker-Taker Model

The Maker-Taker Model is a pricing system used by many stock exchanges and Electronic Communication Network (ECN)s to create liquidity in the market. In simple terms, it's a fee structure that rewards participants who “make” the market and charges those who “take” from it. Imagine an exchange's order book, a list of all buy and sell orders. A “maker” is an investor who places a limit order—an order to buy or sell a stock at a specific price or better—that doesn't execute immediately. This order sits on the order book, adding to the available pool of shares for others to trade against. By adding this resting order, the maker provides liquidity. In contrast, a “taker” is an investor who places an order, typically a market order, that executes immediately against an existing order on the book. They are “taking” the available liquidity. The model is designed to encourage a deep and active market by financially rewarding those who are willing to wait for their price.

It all boils down to rebates and fees. The exchange wants to encourage investors to post orders and wait, as this creates a tighter bid-ask spread and a more stable market for everyone. To do this, they literally pay the makers and charge the takers.

• The Market Maker: You place a limit order to buy 100 shares of XYZ Corp at $50.00 when the best offer is $50.05. Your order can't be filled instantly, so it's added to the order book. You are now a “maker.” When another investor comes along and sells their shares to you at $50.00, the exchange pays you a small rebate for providing liquidity (e.g., $0.002 per share). So, you get your shares and a tiny payment.
• The Market Taker: You need to buy 100 shares of XYZ Corp right now. The best available offer is $50.05. You place a market order to buy, which immediately executes against that resting sell order. You are a “taker.” For the privilege of this instant execution, the exchange charges you a fee (e.g., $0.003 per share).

This fee difference ($0.003 - $0.002 = $0.001 per share in this example) is how the exchange makes money on these trades.

As a value investor, your mantra is to buy great companies at fair prices and hold them for the long term. You're not a day trader, so why should these tiny, per-share fees matter? The answer is simple: Every penny counts. Over a lifetime of investing, transaction costs can silently eat into your returns. Understanding the maker-taker system empowers you to be more cost-efficient. By primarily using limit orders that don't execute immediately, you are acting as a market maker. Not only do you get to set the price you're willing to pay—a core discipline of value investing—but you may also receive a rebate from the exchange instead of paying a fee. While your broker might have its own commission structure (some even use payment for order flow (PFOF) to offer “zero-commission” trades), the underlying exchange fees are still part of the market's plumbing. Being a patient “maker” aligns perfectly with the value investor's patient mindset and helps you minimize costs, maximizing your long-term compounding potential.

Just to keep things interesting, some exchanges flip this model on its head. This is known as the Taker-Maker Model (or the inverted model). In this system:

• Takers (who use market orders for immediate execution) receive a rebate.
• Makers (who place resting limit orders) pay a fee.

Why would an exchange do this? This model is designed to attract aggressive traders who want to execute large orders immediately and are willing to pay for others to post the liquidity they need. It creates a different kind of trading environment, often attracting high-frequency trading (HFT) firms that prioritize speed and rebates for taking liquidity.

The maker-taker model is a fundamental piece of modern market structure. It's an incentive game designed to solve a classic problem: how to ensure there are always buyers and sellers ready to trade at any given moment. For the everyday value investor, you don't need to obsess over which exchange your order is routed to. However, understanding the principle is powerful. It reinforces the wisdom of using limit orders. By patiently setting your price, you not only exercise discipline but also align yourself with the market's own incentive to create stability. You avoid paying the “impatience tax” charged to takers and might even get a small reward for it. It's a small but significant way to ensure more of your money is working for you, not lost to the friction of trading.