Post-Only Order: A Deep Dive for Crypto Traders

Post-Only Order: A Deep Dive for Crypto Traders

Definition: A post-only order is a type of trading instruction that ensures your order only acts as a maker order. This means the order will be placed on the order book and not immediately executed against existing orders. If your order would execute immediately (become a taker), it will be automatically canceled.

Key Takeaway: Post-only orders are designed to ensure your order adds liquidity to the market and qualifies for maker fees, potentially lowering your trading costs and avoiding slippage.

Mechanics: How Post-Only Orders Work

A post-only order is a limit or conditional limit order that will only be placed on the order book if it does not immediately execute against an existing order.

Let's break down how this works step-by-step:

1. Order Placement: You submit a limit order with the 'post-only' option enabled. This tells the exchange to treat your order differently.

2. Order Book Check: The exchange's system checks your order against the current order book. This is essentially a list of all existing buy and sell orders.

3. Execution Check: The system determines if your order could be immediately filled (would be a taker order). This happens if your buy order price is equal to or higher than the lowest sell order (the ask price), or if your sell order price is equal to or lower than the highest buy order (the bid price).

4. Order Handling (Maker vs. Taker):

   • Maker Order (Order book placement): If your order cannot be immediately filled (i.e., it would add liquidity), it's placed on the order book as a limit order. You become a maker, and your order awaits another trader to execute against it.
   • Taker Order (Order cancellation): If your order could be immediately filled (i.e., it would take liquidity), the exchange cancels your order instead of executing it. This is the core function of the post-only feature.

5. Fee Implications: Because you're acting as a maker, you typically pay lower fees than if you were a taker. This can significantly impact your profitability, especially if you trade frequently.

Example: Imagine the current market price of Bitcoin (BTC) is $30,000.

• You want to buy BTC, and you place a post-only limit buy order at $29,990. Because there are no sellers at $29,990, your order is added to the order book. You are a maker.
• If, instead, you placed a post-only limit buy order at $30,005, your order would be immediately filled (as it crosses the ask price) and would therefore be cancelled.

Trading Relevance: Why Use Post-Only Orders?

The primary reasons for using post-only orders are:

• Lower Fees: Exchanges often have a maker-taker fee structure. Makers (those who add liquidity) typically pay lower fees than takers (those who take liquidity). Post-only orders ensure you qualify for the maker fees.
• Slippage Reduction: Slippage is the difference between the expected price of a trade and the price at which it is actually executed. By ensuring your order adds liquidity, you can avoid slippage that might occur with immediate market orders (which are inherently taker orders).
• Liquidity Provision: Post-only orders contribute to the overall liquidity of the market. This makes it easier for everyone to trade at the desired prices.
• Strategic Trading: Sophisticated traders often use post-only orders to execute complex trading strategies, such as arbitrage or market-making, where controlling the order execution is crucial.

Risks of Post-Only Orders

While post-only orders offer benefits, they also come with risks:

• Order Not Filled: Your order might not be filled if the price never reaches your limit price. This means you might miss out on potential trading opportunities.
• Market Volatility: In volatile markets, the price can move quickly, and your order might be cancelled before it can be filled, or the price might move past your order before it can be executed.
• Opportunity Cost: Because your order is only placed as a maker, you might miss out on immediately available trading opportunities if the market moves quickly. This can lead to opportunity costs, especially if the price moves significantly in a short time.

History and Examples

Post-only orders have become increasingly common with the growth of crypto exchanges. They are now offered on almost all major centralized exchanges (CEXs) and are also becoming available on decentralized exchanges (DEXs).

• Early Adoption: In the early days of Bitcoin trading, the concept of maker-taker fees wasn't as prevalent. As exchanges grew and competition increased, fee structures became more complex, and post-only orders became a valuable tool for traders seeking to minimize costs.

• Institutional Use: Institutional traders and market makers, who often trade large volumes, heavily rely on post-only orders to take advantage of maker fees and reduce slippage. They may also use sophisticated trading bots with post-only orders to implement market-making strategies.

• Examples of Use Cases:

  • Limit Orders near the Spread: Traders frequently use post-only orders when placing limit orders near the bid and ask prices to capture the spread and become a market maker.
  • Arbitrage: Traders can use post-only orders to simultaneously buy and sell an asset on different exchanges, profiting from price discrepancies. They will typically place post-only orders to ensure they become a maker on both sides of the trade.
  • Market Making: Dedicated market makers use post-only orders to provide continuous liquidity to the market. They place numerous limit orders at various price levels, earning the maker fees as other traders execute against their orders.

• Exchange Adoption: Major exchanges such as Binance, Coinbase, Kraken, and Bitstamp all support post-only orders. They are frequently used by traders across different asset classes, from major cryptocurrencies like Bitcoin and Ethereum to altcoins and derivatives markets.

Post-only orders are a powerful tool for crypto traders, offering lower fees, reduced slippage, and the ability to contribute to market liquidity. Understanding how they work and the associated risks is crucial for anyone seeking to optimize their trading strategy.