Rebate Trading Strategy- What Is It? | How To Receive ECN Commissions
Last Updated on March 23, 2023
What is rebate trading? The aim of rebate trading is not to actually make money from the movement of the price of the asset (at least not only that), but to receive money from the ECN (Electronic Communication Network). So yes, the headline is correct. It is actually possible to have a net income from commissions. This is called rebate trading strategy.
Here is how rebate trading works:
New York Stock Exchange and NASDAQ are stock exchanges. But you do not have to trade directly through them. An ECN lets you trade outside these stock exchanges, even though the stock you trade might be listed on for example NASDAQ.
The issues on ECNs are the same, but the liquidity can vary. In any one instance, the inside market may be different on an ECN than on the public markets (or another ECN), creating exciting arbitrage opportunities for fast computer trading. There are numerous ECNs.
I think all of these ECNs offer the opportunity for the trader to receive rebates when offering liquidity. Let us make an example (I am just making up numbers here, always check this yourself):
You sell 10 000 ABC at 2.51 on for example ARCA. You are offering at that price, ie. you are putting your order out in the marketplace above the bidding price. If your order gets filled, someone else has hit your order and removed liquidity, and you have offered liquidity. That means you get rebated.
Rebate trading works like this: Those who offer liquidity get paid, those who remove liquidity have to pay.
Let us say ARCA rebates 0.003 USD per share for offering liquidity*. That means you receive 30 USD in rebate (the other part removing liquidity pay to remove liquidity). If your broker charges .001 per share in commissions, you have made 20 USD (without considering the share price). However, the real cost for executing is higher due to SEC fees, etc, but probably not more than .002 per share. So at least you make 10 USD on this transaction.
I know a few traders who trade very liquid small stocks. They might buy and sell 10 000 shares or more and perhaps make 1 cent on the stock price and get a rebate. Some can actually make really good money on this. I talked to one trader last year who traded 300 000 shares in Citigroup when the stock was in the 2-4 dollar range.
* The prices vary a lot from ECN to ECN. You should always consult the fees yourself before trading.
An example of rebate trading:
To better illustrate rebate trading I will show you a copy of my P/L sheet showing it:
In row 1 the gross profit is 18 USD, the commission is 0.4, the ECN fee (rebate) is minus 0.84 (I received 84 cents), SEC fees are 0.177, and other fees are 0.0886. Total profits are 18.17 USD.
So on this trade, I added liquidity and received 17 cents in addition to my original 18 in profits. Row 6 is also an example of adding liquidity.
In row 2 you can see the opposite. There I paid to remove liquidity.
Thus, for good traders, rebate trading might be a viable option.
Great article, and I am surprised that this opportunity exists. Where I used to trade the fees were quite expensive.
No we are talking about getting paid for trading certain stocks, and that sounds much better.
As I try to figure how someone can make money on this strategy I have some questions, they might be obvious, but still:
When you say that those who offer liquidity get paid, and thosw who remove has to pay. If you would like to sell 1.000 shares at ARCA they would pay 0.003 USD.
But when you bought those same stocks, wouldn’t you have to pay the same ammount because you were removing liquidity?
The strategy of rebate trading is to always bid and offer shares. Take the ticker S, for example. If I want to buy it, I bid at 2.5 for example. If I get filled, I can offer it at 2.52. Then I have added liquidity both ways.
I am not certain about those fees numbers. I’m not a rebate trader myself, I mostly remove liquidty.
Ah, now I got the picture. It’s an interesting way of making business from trading, odd but yet fasciating.
I guess this would be a good for algo trading?
Yes, algos use to add liquidity.
Doesn’t this assume that the price just stays in a tight range for a long time? I put an offer at 10.01 and if gets lifted, adverse selection would say that the price will move higher say to 10.04. This move is likely because you are competing against other limit orders so likely you are not first in line to be executed. In this example, you just lost .03 per share with a rebate of less than a cent. I never understood how rebate trading could overcome these adverse moves.
One thing I read is that many of the algo traders use a order type called “hide not slide” that allows their orders to jump to the front of the line.
Yes, you’re right. This is no walk in the park and no easy money. But there are other ways where the rebate trading is one part, and the direction is another. Personally I both enter and exit with the aim of adding rebate.