I’m reading around these forums, and apparently you can get rebates for providing liquidity. What is this, how do you do it, and how much is it (rate, I guess)? — ZapCoffee
Mr. Bright, on one of your webinars, I heard you speak about order routing in your firm. You spoke about rebates from exchanges and electronic communications networks (ECNs). Is my broker getting paid for my orders as well? Can you go into more detail about this rebate trading, and how it may affect the average retail trader? How is your firm different from retail in this regard? —noobtrader
A couple of good questions.
Things are constantly changing in the world of both retail and professional trading relating to routing and rebates. Historically, firms and traders are paid to “provide” liquidity, which means placing your limit orders and waiting for someone else to either hit the bid or take your offer. We now have “inverse payment” ECNs that actually pay us for “taking” liquidity.
First of all, let me address the idea of rebate trading. This type of trading was popularized in Canada and has spread to China and India in recent years. Not so much in the US, although I’ll get to what US firms do in a minute.
We need to be clear on our decimal-point placement when we’re speaking about charges to traders, and the amounts that are rebated. In the Canadian model, the firm may pay $250 to $500 per day per selected symbol. For example, firm XXX may pay $400 per day for all the shares executed in, say, Bank of America (BAC). The firm may have 100 or more traders trading just BAC each day (a popular symbol right now). They may easily trade 100 million shares of BAC a day and charge their traders as little as 20 or 30 cents per thousand shares.
Most retail firms trade against you, match orders with other customers, or sell the order flow to a third party to enhance their revenues without passing any of this along to their customers.Let’s take the middle at 25 cents for our example — 100 million shares x $0.25 = $25,000 per day minus the $400 clearing costs, netting the firm about $24,600 per day — that’s not bad. Add to that the rebates of possibly 20 cents per hundred that is split with the traders, and the profits multiply for the firm exponentially. Even if the traders actually lose money, the firm does well — low risk when you have hundreds if not thousands of traders trading the same symbols.
Now, let’s address US firms. Here is a link to a page that goes into detail about the actual routing to obtain rebates (www.stocktrading.com/routing2012.xls). There are many more destinations, and we have inverse ECNs that pay us to take liquidity. The amounts do change and vary based on overall share volume and other factors.
At Bright Trading, we have the ability to use the Goldman Sachs (GS) smart order router called SigmaX. This will allow our traders to “ping” the sites that pay us first in the order of routing. This allows us access to the GS and BATS dark pools. The dark pools will take a full half penny off of the limit price we entered, or not be executed, thus going to the next destination. We then go to the “best” destination available.
Now, we need to address the “manual” trader who prefers to get paid for everything, no matter what. We can use hot keys to automatically send orders to a destination that will pay us a small amount, say $0.03 versus paying $0.21 to the NYSE. For a serious trader, these benefits can add up to thousands of dollars per month. As I mentioned in an earlier column, we teach our people to park their orders on a site where we get paid for providing liquidity, and to hit bids and take out offers with a site that pays us for taking liquidity, again possibly saving thousands of dollars per month.
Finally, let me address whether the retail broker is allowing you to collect these payments. I called around and checked some fine print in my search for an answer. Unfortunately, it varies from firm to firm. Over the decades, most retail firms trade against you, match orders with other customers, or sell the order flow to a third party to enhance their revenues, without passing any of this along to their customers. I am finding that most firms do not as a matter of practice pass along these rebates. If you’re an active trader, I suggest you shop around to find one that does allow these “pass-throughs.”