I certainly would not play that game. It seems to be the only explanation so far for the extreme volume and tight spreads that don't seem to move. I was able to find one page with info about this sort of trading and it seems to make some sense. There is very little information I can find on the whole practice in general. Here is the info I found:
Playing the Rebate Game
Some ECN traders now rapidly move in and out of liquid positions solely to collect high-volume rebates
By: A.D. Barber
Issue: July 2005
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Discuss this topic: Rebate Trading
Some traders speculate that as much as one-fourth of the daily volume in certain stocks traded through ECNs stems from a new arb strategy in which prop traders generate volume in exchange for rebates.
ECNs commonly give rebates for high-volume transactors as a way to create liquidity. So-called "rebate traders" execute large transactions through ECNs in very liquid stocks with low intraday volatility and narrow bid/ask spreads. They rapidly move in and out of these positions, sometimes regardless of minor transaction losses -- purely to generate rebates. With massive leverage and minimal execution costs, traders at some proprietary firms actually grind out a living doing this despite having a flat P&L.
"So itâs come to this," sighs one equity trader at a major bank. "They canât figure out any other way to make money in this environment so they sit there arbitraging ECN kickbacks versus the fixed cost per trade cost charged by their clearing firms."
When asked about the practice, an Archipelago spokesperson was quick to point out that Arca pays rebates to liquidity providers only.
"On the OTC side, we rebate two mils to liquidity providers and charge three mils to those taking it," she says.
JDSU, a low priced stock that trades heavily intra day with a spread as low as a penny, is cited as a prime example of a stock heavily traded by rebate desks, according to observers.
The strategy is not without its risk. A sudden, unexpected event that could interrupt trading would be a disaster for anyone leveraged up. "The rebate game is like anything else," says one trader. "It works until it stops working."
As they become increasingly competitive in their efforts to recruit traders, proprietary equity firms now advertise minimum capital commitments and higher leverage factors. In the past, proprietary equity firms typically would require a $10,000 opening capital minimum and offer 20 to 1 intra day leverage. Today some firms advertise 30 to 1 leverage and opening capital requirements as low as $2,000.
For rebate traders, who have tiny risk-reward parameters and generate huge volume, the leverage available can be much higher. Some firms now advertise leverage of as much as 300 to 1 for traders who focus purely on rebate strategies.
