Market Making for Exchange Rebates in Tight-Spread Stocks

Summary

The document explains a short-horizon market-making tactic that seeks exchange rebates when quoting in a stock with a narrow bid–ask spread. A market maker first sells at the ask, then moves its quotes up by one price increment and waits for a buy at the former ask. If both sides fill at that same price, the maker earns rebates on the buy and sell while avoiding a price difference between them. The example describes a 1,000-share quote and a historical NYSE rebate rate from March 2009 to illustrate the mechanics.

The approach depends on fills arriving quickly and on rebates exceeding fees and other trading costs. The example does not account for adverse selection, queue priority, execution uncertainty, inventory risk, or changing exchange fee schedules. A matching buy and sell is not guaranteed, and a narrow spread alone does not establish that the tactic is profitable. The document offers a conceptual illustration rather than performance data or a tested implementation.

Key ideas

• The strategy seeks exchange rebates by providing liquidity on both sides of a stock market.
• After a sell fills, the market maker can reprice its quotes to seek a buy at the same price.
• The example illustrates rebate income on both executions without a price gain between them.
• Profitability depends on fill probability, costs, queue position, and exposure to adverse price moves.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.