Rebate Trading (trading)

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Rebate trading is an equity trading strategy that uses ECN ([Electronic Communication Network]) rebates as a primary source of trading revenue and, or profit. ECN's are matching engines for buyers and sellers. Examples of ECNs are Island, Instinet, Archipelago, TRAC, BATS, amongst others. These participants in the NASDAQ stock market allow traders to access the market directly without any bureaucratic communication with a broker. For this service, the ECN would charge an access fee to the party that hits bids and takes offers. Those who posted bids and offers would receive a portion of that access fee as a "rebate". When trading millions of shares, fractions of pennies add up. Contrary to the conventional / standard buy low, sell high trading models, rebate trading provides the ability for traders to buy low, sell low with a profit. Traders provide liquidity to the market by posting bids and offers on ECNs. The way the ECN model works is that they charge an access fee to remove liquidity, sell to bids or buy offers. A portion of this access fee would be forwarded to the party/trader posting such bids and offers. When the equity markets changed from fractions to decimals, this particular strategy took off. Daytraders gravitated to this methodology soon after 9/11/01 due to its lucrative rewards in a dismal market. It was not unheard of that a trader would lose money in P&L, but net the day with a handsome profit due to the rebates generated by the high volume trading. Active participants in this model were Domestic Securities, owned by the god-father of day-trading, Harvey Houtkin, and Barkley Trading, LLC.