I've noticed a few threads on this topic and it truly aroused my curiosity as I always presumed these sort of strategies were exclusive to High Frequency Traders. Here are some amateur questions that I have regarding this matter: 1) What exactly is rebate trading and how does one 'add liquidity'? Does it involve posting bids/ offers via any ECN of your choice (ex: BATS or EDGE A)? 2) Where can I learn more about this strategy (books, links or any other resources will be much appreciated)? 3) Is this sort of strategy still prominent or sustainable considering the proliferation of HFT? Thanks a lot for taking the time to answer these questions. Of course, I did do a thorough search and didn't get too far, hence I decided to ask here.
You will require a broker that will give you Direct Marker Access (DMA) to the ECN you'd like to send your orders to. Then you need an agreement with that broker to pass the rebates back to you and commissions low enough to take advantage. As for strategy, your on your own. If you route orders to the ECN and you're not taking liquidity (buying on the posted offer/selling on the posted bid), then you're adding liquidity. If you take you pay, if you add you get paid. You'll need high volume and VERY low rates to make money trading this way...Good Luck.
I would recommend checking out LES Trading i am with them and know their rebate traders make the most out of everyone in the group. I think a lot of traders get HFT and rebate trading mixed up, totally two different ball games. HFT traders are more concerned with millisecond executions as rebate traders are primarily adding liquidity (getting the rebate) and going after the mid-point prints. Don't take my word for it, i am a technical trader but see what these traders do everyday.
Be careful of les trading: http://www.elitetrader.com/vb/showthread.php?s=&threadid=221507&highlight=LES+Trading
Thanks a lot rmorse, that certainly helped clear a lot of doubts. Just to clarify, let's say XOM had the following bid-ask spread: Bid: 82.03, Ask: 82.04 1- Is it safe to assume that in order to collect liquidity, I shouldn't use limit buy/ limit sell orders, but instead post bids or offers that vary from the spread and wait for them to get hit? For the aforementioned example concerning XOM, if I wished to go short, I would post an offer at 82.05 in order to collect a rebate. 2- Regarding ECNs, can I use any ECN (ex: BATS) or do I have to use a particular ECN based on level II quotes?
In general, this strategy is used on low priced, slow moving stocks that trade high volume. Citibank before the split would be the best example. You must use limit orders. What matters is the price you bid/offer compared to the current market. However, in your example, you could either bid 82.03 or offer at 82.04. In either case you're adding liquidity. You would be taking liquidity if you bid 82.04, or offered at 82.03. Of course you can always bid lower, or offer higher and wait for moves in the stock. You can only use the ECNs that you broker has access to. You would typically route your order to either the exchange that does the most volume in that stock, or has the smallest size at that time, because most exchanges place you on the order book based on time of entry. The fees that the exchanges pay or charge change all the time. You have to check their website often.
Dont forget... u need to have BIG $$ to get into this game. very hard for joe blow at home to compete with massive firms doing this.