Maker-Taker Model
An exchange fee structure that charges traders who remove liquidity from the order book (takers) and pays a rebate to traders who add resting limit orders to the order book (makers), incentivising the provision of displayed liquidity.
The maker-taker model was pioneered by electronic communication networks (ECNs) in the United States during the late 1990s as a way to attract order flow by making it economically attractive for traders to post limit orders. The logic is straightforward: a market order (or any order that immediately matches against an existing resting order) consumes liquidity, while a limit order that rests in the book until matched creates liquidity. Exchanges adopting the maker-taker model reward liquidity creation and charge for liquidity consumption.
In a typical maker-taker structure, a taker pays a fee of, for example, 30 basis points on the value of the trade, while a maker receives a rebate of, for example, 20 basis points. The exchange retains the 10-basis-point difference as revenue. High-frequency market makers — firms that continuously post quotes on both sides of the market in large quantities — generate substantial rebate income, which subsidises their overall trading operations and allows them to quote tighter spreads than they otherwise could.
The model's critics argue that it distorts order routing decisions. When a broker routes a client order to an exchange that offers maker rebates, the broker may have an incentive to post that order as a limit order (earning a rebate) even when a market order would better serve the client's execution objectives. This conflict of interest is one of the motivations behind best execution requirements that force brokers to consider client interest rather than rebate income.
In India, NSE and BSE operate under a fee structure set by SEBI guidelines. The exchanges charge transaction fees based on the value of trades, and these charges are passed on to clients through brokerage invoices. The pure maker-taker rebate model of US equity markets has not been the dominant structure at Indian equity exchanges. However, the exchanges have from time to time offered liquidity enhancement incentives (LEIs) — schemes that paid rebates to registered market makers in certain illiquid stocks or derivatives contracts — which share conceptual similarities with the maker-taker model.
For the currency derivatives segment, NSE operated a liquidity provider scheme that offered fee rebates to members who maintained continuous two-way quotes within specified spread limits in currency futures pairs. This was explicitly structured as a maker-taker differentiation, though the fee levels were modest relative to the US market.
Understanding the maker-taker model is essential for anyone analysing exchange economics, broker order-routing practices, or the incentive structures facing market makers. The model shapes observable phenomena including the width of quoted spreads, the depth of the visible order book, and the ratio of passive to aggressive order flow.