What Is Rebate Trading? How To Receive Commissions

Last Updated on October 16, 2021 by Oddmund Groette

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). Yes, the headline is correct. It is actually possible to have a net income from commissions. This is called rebate trading.

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 interesting 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 S at 2.51 at 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.

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 some 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 in addition, 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.

 

Disclaimer: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.