What is Rebate Trading?
It is a technique of day trading and profiting in stock market. Here instead of trader paying the commission for buying and selling, he is being paid by the service provider. ECN rebate is the primary source of profit.
In 1998, an Electronic Communication Network (ECN), a type of computer system that facilitates the trading of financial products, outside of stock exchanges, came into existence as an Alternative Trading Networks (ATN). Primarily stocks and currencies are traded here.
They increase competition among the trading firms, by providing faster execution, lower transaction costs, transparency of order books, extended trading services beyond exchange trading hours.
These electronic communication networks, charge commission to the traders. But they pay commission to the market makers, for creating liquidity.
These market makers, make money by trading low priced, high volume stocks. They provide liquidity in the market by continuously providing ask and bid spread for the traders and trade millions of shares in a single day in thousands of trades. So they trade more number of shares, with the available capital. They limit their risk by continuously squaring their position and creating new position. This increases liquidity and facilitates the functioning of ECNs.
They not only get paid by the ECNs, but they also make money by Scalping small profit which is the difference between the ask and bid price. Although the profit is small, owing to the thousands of trades they make, the profit can be substantial. Added to this they need not pay the brokerage.
The individual scalpers choose low liquidity scrips so that the ask and bid difference is wide enough to pay for the brokerage and other expenses and still give them some profit.
The liquidity and volatility affects the spread between the ask and bid prices, there by affecting the overall profit.