Topic: Mt.Gox trading fees: is a revision due? (Read 2901 times)

BFX used to account for 10-15% of all MtGox trades (seriously). BFX just got Bitstamp (BSTP) routing in addition to MtGox. MtGox instantly lost a large percentage of their volume. These are the fees charged at BFX at the moment:

BFX trades: 0.1%
BSTP trades: 0.25%
MtGox trades: 0.5%

I can choose where to route my orders where I enter them, and selling or buying at BSTP makes more sense in many cases. If there's a bid at $138 at both BSTP and MtGox then I'm obviously going to sell the BSTP bid since that costs me half of what it costs me to sell at MtGox. This applies even more so if there's a BFX order I can meet.

In short: MtGox may have to lower their fees eventually or they will loose volume.

Thank you very much for the spreadsheet and your image Sir, what would in your opinion be the best fee structure for super volatile markets ? I have no experience with normal stock markets, so don't have any experience with that.

I came across this blog post that explains how major exchanges set their fee schedules to promote liquidity:

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

The whole point is that percentage based fee system introduces complications... Nothing wrong with a fixed% if you only go to the exchanges to buy or sell something and than leave. But in terms of trading, fixed% is not suitable for our super volatile market  

I'm totally fine with MtGox charging more money

They need the extra revenue in order to be able to service the exploding growth in bitcoin.

The more they charge, the more attractive it is for competition to spring up, which is good for bitcoin

The less they charge, the more vulnerable they are to things like legal challenges and causing disruption and killing market confidence due to being understaffed, and these aren't good for bitcoin.  The less likely they will be able to acquire resources and staffing to (for example) beef up their system so they can handle more trading.

The right price is set by supply and demand... it's not too high if lots of people are willingly paying it and keeping them busy.  The way I see it, their price could and should go up for bitcoin's benefit.

What do you all think about bitstamps's trading fee schedule, is it better than MtGox's ?

https://www.bitstamp.net/fee_schedule/

To get to 0.29% comission fee at MtGox you have to trade a volume of 25000 btc for last 30 days = 1.45 mill USD with current prices.

To get to 0.2% comission fee at Bitstamp, you have to trade $150,000, and at current prices this equals 2.5K USD!

So, the bitstamp fee structure seems to be significantly better than the structure at MtGox, and that's probably why the trade volume at Bitstamp has increased, at least for traders who care about the fees, this is quite the difference.

What do you all think about bitstamps's trading fee schedule, is it better than MtGox's ?

https://www.bitstamp.net/fee_schedule/

To get to 0.29% comission fee at MtGox you have to trade a volume of 25000 btc for last 30 days = 1.45 mill USD with current prices.

To get to 0.2% comission fee at Bitstamp, you have to trade $150,000, and at current prices this equals 2.5K USD!

So, the bitstamp fee structure seems to be significantly better than the structure at MtGox, and that's probably why the trade volume at Bitstamp has increased, at least for traders who care about the fees, this is quite the difference.

Bitcoin exchanges must adopt mainstream exchange fee schedules, which incentivize market makers, in order to substantially increase liquidity.  In this paper I will propose a hypothetical bitcoin exchange, modestly called the “Super-Exchange”, that will increase liquidity for all trading between currencies, however, BTCUSD will be used throughout the paper as an example.  In the context of the Super-Exchange, liquidity means bitcoins can be traded for other currencies without causing a significant movement in the BTCUSD price and with minimum loss of value.[1]

Unfortunately, all bitcoin exchanges currently use a flat percentage model, which does not promote liquidity.  For example, Mt. Gox (Japanese based exchange), and CampBX (US based exchange) charge 0.6%[2] and 0.55%[3] respectively, for each transaction, to both the buyer and the seller.  Under this model, especially with such high commissions, there is no incentive for market makers to participate.

Modern exchanges employ the “make-or-take” model to incentivize market makers to provide liquidity.[4]  Under the make-or-take model market makers make money it two ways, 1) “trade across the bid-ask spread,” and 2) “earning liquidity rebates.”[5]

How market makers profit
The first way market makers generate revenue is to trade across the bid-ask spread by offering to buy a commodity or security at a certain price, and sell the same commodity or security at a higher price.  For example, a market maker on the Super-Exchange exchange may offer to buy bitcoins at $4.90 USD, and sell bitcoins at $4.91.  The market maker makes money by buying low to one trader and selling high to another trader many, many times throughout the day.

The second way market makers generate revenue is through liquidity rebates.  Modern exchanges, like the NYSE, charge the “liquidity taker” a commission for every share bought or sold, typically three tenths of a penny.  The exchange gives two tenths of a penny to the “liquidity maker,” called a liquidity rebate.  The exchange keeps the last tenth of a penny as profit.  Liquidity takers are traders that execute market orders against “resting limit orders.”  Liquidity makers are market makers that submit “resting limit orders,”.  A resting limit order is simply an order that is either an offer to buy below the current lowest ask price, or an order to sell above the current highest bid.

For example, on the NYSE, if the current highest bid for company C stock is $9.98, and the current lowest asking price is $10.01.  The market making firm, “MM,” enters limit orders to buy and sell C’s stock for $9.99 and $10.00 respectively, narrowing the spread.  If a liquidity taker, or “trader,” enters a market order to buy 50 shares of C from MM for $10.00, and another trader enters a market order to sell 50 shares of C to MM for $9.99, then MM will make $1 trading across the spread and $0.20 cents in liquidity rebates.  As more market makers enter the exchange, the spread gets tighter and tighter because market makers must compete for volume.  Furthermore, as the spread gets tighter, market makers generate substantially higher revenues through liquidity rebates rather than trading across the spread.

Under the make-or-take model, both market makers and traders benefit.  In 2008, market makers made over $21 billion dollars.[6]  In 2009, Jim Simmons and Ken Griffin (who both run liquidity-making hedge funds) personally took home $2.2 billion and $900 million, respectively.[7]  Traders also benefit by having a stable exchange rate though tighter spreads that create insubstantial differences between trades, even with high volume transactions.

Applying Make-or-Take Model to Bitcoin Exchanges
The Super-Exchange must employ the make-or-take model between bitcoin and local currencies, because employing the make-or-take model will maximize liquidity and increase volume.   Furthermore, the Super-Exchange will also increase revenue because an increase in liquidity also creates an increase in transaction frequency, which is when the Super-Exchange makes a profit.  For example, the Super-Exchange charges the trader 0.0003 bitcoins per bitcoin bought or sold.  The market maker receives 0.0002 bitcoins, and the Super-Exchange retains 0.0001 bitcoins as profit.

Note, the make-or-take model is only feasible because the Super-Exchange also holds the deposits of the market makers and traders.  Under the example of the make-or-take model the commission is only 0.0003 bitcoins, whereas transactions across the bitcoin network, without an intermediary, are typically 0.01 bitcoins or higher.  Thus, the commission to actually make the ownership transfer across the bitcoin network would be greater than the Super-Exchange’s commission, e.g., 0.0003 bitcoins.

Traders, or in this case depositors in the Super-Exchange, will enjoy tighter spreads and a much more liquid market with higher volume, rather than massive 1% jumps between two transactions executed seconds apart, often with a total transaction volume of less than 3 bitcoins.


[1]See Market Liquidity, Wikipedia, http://en.wikipedia.org/wiki/Market_liquidity, as of April 3, 2012.

[2] Mt. Gox Fee Schedule, https://mtgox.com/fee-schedule, as of April 6, 2012.

[3] CampBX FAQ, https://campbx.com/faq.php, as of April 6, 2012.

[4]Regulating High Frequency Trading: An Examination of U.S. Equity Market Structure in Light of the May 6, 2010 Flash Crash, Stephen Barnes, available at http://www.sec.gov/comments/s7-02-10/s70210-341.pdf, at 4; See SEC Concept Release on Equity Market Structure, 75 Fed. Reg. at 3607.

[5]Regulating High Frequency Trading: An Examination of U.S. Equity Market Structure in Light of the May 6, 2010 Flash Crash. at 5.

[6]Id. at 4.

[7]Id.

I came across this blog post that explains how major exchanges set their fee schedules to promote liquidity:

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

One of the reasons MtGox cited in the past for it's relative high fees was to allow competition into the market. If they went to the lowest fee they can manage, their market share would go even higher. Currently you can just use a different exchange (or even a meta-exchange like bitfinex) to get less fees.

This might be a good time to cut fees by 75%

I agree the fee scheme needs to be revised:

I wrote MtGox this e-mail today:

I think the fees schedule would benefit from a revision, but given Mt.Gox's market dominance, I can't see what would make them actually do it except for significant competition from another exchange. From their point of view it would just be a giveaway - offering the same service for less, when they are not exactly short of customers signing up at the present prices.

Bitstamp does their fee schedule based on dollar trading values, rather than BTC, though. You would think that it would work well, since their business costs are then denominated in the same currency as their income.

For me, the other problem with Mt.Gox's fee schedule is the jump from 0.4% for >5,000BTC to 0.3% for >10,000BTC. This is a huge step and it is also a huge target to try to reach. Even a new layer of 0.35% for >7,500BTC would help.

As it is, a bot trader operating on thin margins and trading 9,000BTC per month is at a serious disadvantage compared to another trader doing 11,000BTC and is paying more in fees (36BTC compared to 33BTC each month)

I have a question about trading fees.

I guess these limits were set a lot earlier, when the btc-price was a
lot lower.

So say you need to trade 25000 bitcoins to have a trading fee of 0.29%,
that involved a lot less money when the bitcoin price is 5, as compared
to the bitcoin price being 40.

At 25000 btc, a price of 5 gives a USD trade total of 125000, while at a
price of 40 this gives a trade total of 1000000 (1 million USD).

I think it would be better to have flat rates for USD, so that the
current requirement for a 0.29% trade fee would be lowered to 125000/40
= 3125 BTC.

As it is now, getting lower trade fees is very difficult unless you're
an extreme high roller.

Basically it's become about 10 times more difficult to get lower trade
fees.

Can you query Mark with this ? Thanks.

Hello

Thank you for your email. The fees are charged entirely on the volume and the fee varies according to each interval for the volume.

For Eg : If a new user trading 1000 BTC.

For your first 100, you will be charged 0.6% then the second 100 Bitcoins you sell you will be charged 0.55% then for teh 200-499 bitcoins you sell, you will be charged 0.53% and for the 500-999 bitcoins he trades, he will be charged 0.5% and the 1000th bitcoin traded he will be charged will be charged 0.46%.

Please note that this would have to be the volume in 30 days so every thirty days the Volume Discount Display on User's Panel will be revised.

Another Eg:

Let say a user trade's 200 bitcoins this month, but don't trade again until another 2 months. In the next 2 months, user will start at 0.6% again for his first 100 bitcoins. But if he continue to trade everyday, his volume discount should remain based on the past 30 day volume.

Let us know if you would require any further assistance regarding this issue.

Thanks,

MtGox.com Team