What Is Rebate Trading?
- Thread starter ZapCoffee
- Start date
Equity exchanges pay traders to provide liquidity (think of that as providing a passive, non-marketable, limit order).
Those fees vary from exchange to exchange and trading costs vary by each broker - but if your P&L ends up $0 each day but your trades all provided liquidity it is possible that you will have a net profit on the day.
Essentially your trading and clearing costs need to be lower than what the exchange pays you for providing liquidity.
In that case the rebates you receive for providing liquidity would be higher than your fees generated by trading.
Those fees vary from exchange to exchange and trading costs vary by each broker - but if your P&L ends up $0 each day but your trades all provided liquidity it is possible that you will have a net profit on the day.
Essentially your trading and clearing costs need to be lower than what the exchange pays you for providing liquidity.
In that case the rebates you receive for providing liquidity would be higher than your fees generated by trading.
It sounds then like this would require 1 of 2 cases?
1) An exchange membership and a really large account
2) A really, really leveraged low commission account (prop trading?)
What types of markets would you want to focus on and why?
Trending markets would be 'volatile' by nature in that a strong move in 1 direction creates volatility on a normal dist. Maybe you could find large amounts of buyers in 1 direction in a down-trending market & vice-versa?
edit: HFT traders can quote on sub-pennies!!! Can they just do this all day long and live off of 'liquidity fees'? If yes, how can any non-HFT liquidity trader possibly hope to compete?
re-edit: Wouldn't HFT providing liquidity during trends essentially turn all markets into ranging markets by nature of HFTers competing vs other HFTers (eg 1 guy provides enough liquidity to move down trend up, other guy now provides liquidity on the down-side in the up move.. bringing price down.. the gap continues to narrow and suddenly its a ranging market)?
I've explained this a few times... a short review.
A firm, mostly Canadian, will negotiate a single price (ticket charge) for a symbol, take BAC.
They will pay about $300-$500 per day for ALL trades in that symbol.
They will charge traders really cheap commissions, maybe even 30cents per 1000 shares.
The traders will trade 100 million shares per day. Thus the Firm receives $30,000 per day from traders for the $500 fee to clearing firm.
Traders and firm will split the 25cent per 100 share rebate for providing liquidity from the ECN (ARCA for example). The Firm keep half or more of those profits.
Traders can lose a few $1000 per day, and still make money for the Firm net, even some for themselves.
My friend at Swift will send the "good traders" to us if they want to actually learn how to trade reality, and real money.
FWIW,
Don
A firm, mostly Canadian, will negotiate a single price (ticket charge) for a symbol, take BAC.
They will pay about $300-$500 per day for ALL trades in that symbol.
They will charge traders really cheap commissions, maybe even 30cents per 1000 shares.
The traders will trade 100 million shares per day. Thus the Firm receives $30,000 per day from traders for the $500 fee to clearing firm.
Traders and firm will split the 25cent per 100 share rebate for providing liquidity from the ECN (ARCA for example). The Firm keep half or more of those profits.
Traders can lose a few $1000 per day, and still make money for the Firm net, even some for themselves.
My friend at Swift will send the "good traders" to us if they want to actually learn how to trade reality, and real money.
FWIW,
Don
Glad to help.
Don
Here I have corrected your post for accuracy.
1. 'They will charge traders really cheap commissions, maybe even 30cents per 1000 shares'
This should read maybe even 20c.
2. 'The Firm keep half or more of those profits.'
This should read the firm keep 20% to 25% of the profits depending on volume.
3. 'Traders can lose a few $1000 per day, and still make money for the Firm net, even some for themselves.'
This should read, it is possible for a trader to finish gross negative but net rebate positive however most target gross positive net positive by also capturing the spread along the way.
Apart from that it is all good.
london