How Rebate Trading Works (Quick Guide)

Rebate trading is a strategy where traders utilize passive limit orders to earn exchange rebates by providing liquidity. When the rebate exceeds broker and regulatory fees, traders can reduce or eliminate trading costs and, in some cases, earn a small profit even if the stock price doesn’t move.

What Is Rebate Trading?

Rebate trading is a method of placing passive limit orders that earn exchange payments (rebates) for adding liquidity to the market.

Exchanges reward traders who provide liquidity because it helps maintain tighter spreads and deeper order books.

How Does Rebate Trading Work?

Rebate trading works by sending limit orders that sit in the book; if another trader hits your order, you receive a rebate for adding liquidity.

Most U.S. equity exchanges use a maker–taker model:

• Maker (limit order): Adds liquidity → earns a rebate.

• Taker (market/marketable order): Removes liquidity → pays a fee

You can trade any stock (e.g., AAPL) on multiple venues such as NASDAQ, NYSE, ARCA, AMEX, or regional ECNs. Each venue has unique fee and rebate schedules.

Step-by-Step: How to Execute it

1. Choose a liquid stock.
   Stocks with tight spreads and high volume increase your fill probability.

2. Place a passive limit order.
   Your limit price must be at or above the bid (for sells) or at or below the ask (for buys) to add liquidity.

3. Your order gets hit
   If another trader removes your liquidity, you earn the venue’s rebate.

4. Subtract broker + SEC fees.
   Compare your earned rebate to your broker’s execution and regulatory fees.

5. Calculate your net result.
   If the rebate is greater than the total fees, you gain “negative cost” or “zero-cost” execution.

Example of a Rebate Trade

Imagine selling 10,000 shares of XYZ at $2.50 on AMEX using a passive limit order.

• AMEX rebate for adding liquidity: $0.0035/share

• Rebate earned: 10,000 × 0.0035 = $35

• Typical broker + SEC fees: ~$30

• Net gain: +$5, regardless of price movement

Note: Venue fees and rebates vary. Always check your broker’s fee schedule.

Is Rebate Trading Profitable?

Rebate trading can be profitable if the exchange rebate exceeds your broker’s and regulatory fees, while still providing you with reasonable fill rates.

High-frequency traders, prop firms, and active intraday traders frequently utilize this model to minimize trading friction and enhance their net performance.

Benefits of Rebate Trading

Rebate trading can significantly reduce trading costs, improve execution efficiency, and create opportunities for small rebate-based profits. It also encourages patient and disciplined order placement, avoiding the higher costs associated with aggressive market orders.

Risks and Limitations

Rebate trading carries several significant limitations. Because passive limit orders remain in the book, they may not be filled, particularly during fast-moving markets, and prices can shift away from the execution price. Traders must also understand the fee schedules across different exchanges, as variations in rebates and taker fees influence the net profitability of each trade.

Additionally, some brokers do not pass the full rebate amount to clients, which can diminish the benefits of the strategy. Regulatory fees, while often small, accumulate over time and can offset rebate gains for lower-volume traders.

Overall, rebate trading is most effective for traders who understand liquidity behavior and are comfortable with a slower, more patient execution style.

FAQ: Rebate Trading

1. What types of orders qualify for rebates?

Limit orders that add liquidity (i.e., rest in the order book) qualify on maker–taker exchanges.

2. Do all exchanges offer rebates?

No. Some exchanges use taker–maker or other pricing models. Always verify the current fee table.

3. Why do exchanges pay rebates?

To incentivize traders to provide liquidity, thereby reducing spreads and improving market quality.

4. Can you make money solely from rebates?

Yes, but profits tend to be small and depend on volume, venue rebates, and your broker’s fee pass-through.

5. Does my broker always pass rebates to me?

Not always. Some brokers keep a portion of exchange rebates. Check your brokerage agreement.

6. Is rebate trading legal?

Yes, it is fully compliant with U.S. equity market regulations.

7. Are rebates the same across all venues?

No. Each ECN or exchange sets its own maker and taker fees, as well as its own rebates.

Conclusion

Rebate trading provides active traders with a means to reduce costs, enhance execution quality, and, in some cases, earn profits through exchange incentives. Understanding fee structures, utilizing passive orders effectively, and selecting the right broker can transform liquidity-providing activity into a tangible trading advantage.