Home Platforms, brokers, legislation, commission, and slippage Rebate Trading Strategy: What Is It and How to Maximize ECN Commissions

Rebate Trading Strategy: What Is It and How to Maximize ECN Commissions

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:

Rebate Trading

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.


How does rebate trading work?

In rebate trading, traders add liquidity to the market by placing limit orders. They receive rebates from ECNs for offering liquidity. This approach aims to offset trading costs and even generate income through these rebates.

– Why would traders choose to offer liquidity in rebate trading?

Traders offer liquidity to receive rebates. When they place limit orders on the order book above the bidding price and their orders get filled, they have offered liquidity, which qualifies them for rebates.

– Is rebate trading suitable for all traders?

Rebate trading may not be suitable for all traders. It often requires high trade volumes and an understanding of specific ECN fee structures. Successful rebate trading also depends on the trader’s ability to manage transaction costs effectively.