August 30, 2022

Trading Strategy to Get Rebates

Alaric Securities

Rebate trading is a popular strategy where traders place passive limit orders and upon execution, the exchange pays a reward for adding liquidity. The reward is known as a “Rebate” and may vary on each exchange but often, the amount may be higher than the actual cost of the transaction the broker charges. As a result, the trader may achieve zero-commission trading or even better – get paid when trading.

How rebate trading works:

Most exchanges still deploy the “make-take” model where passive orders (“limit orders”) are rewarded for adding liquidity, while aggressive (“market” and “marketable limit”) orders are charged for removing liquidity.

Exchanges let you trade stocks on multiple venues regardless of the stock’s initial listing exchange. For example, Apple (AAPL) is a NASDAQ-listed stock but it can be traded on NYSE, ARCA, AMEX, and many other regional exchanges or ECNs.

ECN fees are charged separately based on exchange flags and on whether they are adding liquidity (“limit orders”) or removing liquidity (“market” and “marketable limit”) orders.

Many exchanges and ECNs offer the opportunity for the trader to receive rebates when offering liquidity.
Here is an example:

You sell 10 000 XYZ at 2.50 on for example AMEX, and your order is a “limit order” above the bidding price and is thus treated as “adding liquidity”. If your order gets filled, someone else has hit your order and removed liquidity. That means you get rebated.

Let us say AMEX rebates 0.0035 USD per share for offering liquidity*. That means you receive 35 USD in rebate. You should discount from this amount your broker charges and SEC fees which for 10,000 shares is usually $30, so you stand to gain $5 on your trade regardless of the change in the price of the stock.

As you can see, depending on what your broker charges for execution, as well as whether they are being honest and passing down the exchange rebates, your net trading costs may be zero, close to zero, or even generate a positive return.

* The prices vary on different venues. Check the fees before trading.

Rebate trading explained: Those who add liquidity get paid and those who remove liquidity get charged.