In Crypto, Fees are High and Speeds are Slow

A simple, but typical, exchange fee model

A typical fee at a crypto centralized exchange (CEX In crypto, CEX stands for centralized exchange, as opposed to an “on-chain” trading platform referred to as DEX or decentralized exchange. ) is about 0.1% (equivalent to 10 basis points or bps). Roughly speaking, if you buy (or sell) 1 ETH for $3000, you pay $3 to the exchange for their service. The fee calculation is based on the amount of money traded, normally in a reference stablecoin, e.g., USDC or USDT.

For decentralized exchanges (DEX), fees can vary greatly, but they are generally on par with, or higher than, the CEX fees.

Asymmetrical fees based on “making” and “taking” liquidity

The simple model above is not how sophisticated trading firms view the fee structure—and indeed, the exchanges offer some nuance to entice the pros. Traders think of their orders as either “making” or “taking” liquidity, Orders that take liquidity are filled immediately by matching with orders already on the book. In contrast, “making” orders typically rest on the book for a longer period, providing liquidity for future trades. and if you are an individual placing a trade, then it is likely that your counterparty is a pro and that they will receive a lower fee or rebate because their order was categorized as “making.”

Let's be blunt: this asymmetry in exchange fees is useful to the exchange and to the professional traders, but not to you.

At PAX, get paid to trade

PAX takes a different approach: we offer zero-cost trading with rebates paid PAX charges high-frequency market makers for access to its platform. Their fees offset the cost to other market participants. to participants regardless of their order type. PAX rebates range from 1.5 to 2.5 basis points (bps) depending on the API combination used. Importantly, at PAX, rebates are available to all participants on all their orders — this is better treatment compared to legacy exchanges that offer lower costs and rebates exclusively to large trading firms using “market-making” order types.

Comparing exchange fees to market spreads

Let's take a closer look at Binance, one of the largest crypto exchanges.

On Binance, the standard fee for spot trading is 0.1% (10 basis points or bps) for both makers and takers. If you're a high-volume trader, you might qualify for lower fees, but you'd need to trade billions of dollars monthly to reach their most favorable fee tier where Binance becomes a maker/taker venue with 2.3 bps for taking and a rebate of 0.8 bps for making. VIP tier 9 for spot & margin trading and liquidity program (LP) tier 4 for spot maker. See Binance trading fee schedule for details. This means the best rebates are reserved for the pros, while regular traders continue to pay higher fees.

Now, let's compare these fees to the actual market spreads. For the BTC-USDT pair on Binance, the typical spread at the top of the book is about 0.015 bps. Analysis done over a three-day period using the Binance trading API. Even when trading a notional amount of $1,000, the average spread doesn't deviate much from this value. Exchange fees are significantly higher than the natural market spreads.

In other words, the main cost of trading for the BTC-USDT pair on Binance isn't the market itself — it's the exchange fees.

Maker/taker and inverted markets

The most common fee structure is referred to as “maker/taker.” Most exchange operators in traditional finance, including NYSE and NASDAQ, operate a maker/taker venue. These trading venues charge a fee for orders that take liquidity (e.g., $0.0030 Representative of the most expensive fee, not the fee offered to their largest customers.

Assuming a share price of $250, $0.0030/share traded is 0.12 bps or 20x lower than the most favorable crypto exchange fee. per share traded) and pay a rebate for orders that add liquidity (e.g., $0.0020 paid per share traded). In this model, NYSE pockets $0.0010 per share traded (the difference between the fee and rebate).

NYSE (and other exchange operators such as NASDAQ and Cboe) also operate so-called “inverted” venues that reverse the side of the execution that gets a rebate with the side that pays a fee: at an inverted venue, the fee is charged to orders that provide liquidity and the rebate is paid to orders that take liquidity. The inverted fee structure represents a small (less than 5%) share of daily volume in U.S. equities.

Maker/taker venues reward participants that form the order book; in effect, those participants are paid for revealing information about the prices at which they are willing to trade. Inverted venues reward natural "taking" order flows, e.g. investors (retail, or otherwise) that for their own needs, decide to buy or sell at market price.

Crypto exchanges often mirror fee structures in traditional finance but are still progressing along this asymptote toward varied and optimized fee models. Crypto markets currently have high fees relative to these mature markets where the exchange fees are always less than the tightest possible bid/ask spread.

“Zero-fee + cash-back” – A new market fee structure

PAX introduces a new market fee structure: "zero-fee + cash-back." This fee structure is unique across all capital markets, both crypto and traditional.

The cash-back rebate program incentivizes natural and fundamental liquidity providers to participate at the venue. The PAX λ API increases competition amongst market makers by outsourcing the speed component of their strategy – it enables market makers and algorithmic trading participants to react to market events as they occur, i.e., with no latency. The capability to cancel out and reprice quotes reduces exposure risk – the risk of adverse selection – for market makers. Reduced risk and increased compeition leads to deeper and more liquid order books, and thus a better market.

Trading at PAX – whether using API or web app based order entry – is zero-cost, forever, with rebates paid for both marketable (“taking”) and limit (“making”) orders. Order entry using the ultra-low latency PAX λ API is opt-in and fee-based.

Wash trading and reversion to zero-fee

PAX expects that almost all trades will experience cash-back, but in certain circumstances, PAX reverts its fee structure from “cash-back” to “zero-fee.” To prevent wash trading, when reverted to zero-fee, marketable (taking) orders pay a nominal and refundable fee of 0.01 bps and resting limit orders are executed free of charge. The nominal taking fee is refunded monthly to all customers, so long as their account is not flagged for wash trading.

But the circumstances under which this occurs are unlikely. For PAX cash-back to revert to zero-fee, it requires that no high speed market maker remain quoting a certain price while other participants incidentally have limit orders at that same price. This describes a scenario high frequency traders know well: a mispriced quote. Because HFTs use the λ API, it is likely that any remaining mispriced liquidity is taken, by λ takers, thus eliminating the opportunity for zero-fee reversion.

For participants that require their marketable order be paid a rebate, PAX offers its “rebate-or-cancel” (ROC) order attribute.

PAX fee structure summary

The fee structure at PAX is based on the combination of APIs used by the maker and taker. As in most crypto exchanges, the standard entrypoint is Websocket Secure (WSS).

Understanding the PAX fee structure

WSS x λ: Marketable orders entered using WSS receive a rebate because they cross with orders placed using the λ API. The λ API is used by market makers to place quotes immediately when a price level is open, and to cancel those quotes (when price change is imminent) to avoid bad fills.

λ x WSS: Market participants using the WSS API place limit orders to avoid crossing the spread. Their limit orders are naturally paired with HFT market taking strategies that use the λ API to respond to relevant market signals. This scenario is short lived because HFT market takers, when responding to such triggers, tend to take out price levels in their entirety.

λ x λ: This scenario is unlikely because of the natural time-priority sorting that causes WSS orders to meet with λ orders.

WSS x WSS: This scenario (“zero-fee”) is unlikely because of the natural time-priority sorting that causes WSS orders to meet with λ orders.