How maker rebates change your real edge

Question

You post passive quotes at 30.00 bid / 30.04 ask on an exchange that pays a maker rebate of \0.0020 per share whenever your resting order is filled, and charges takers a fee. You buy 1{,}000 shares on your bid and later sell 1{,}000 on your ask, both as the passive (maker) side. What do you actually capture on the round trip once the rebate is counted? How low a quoted spread could you tolerate?

Accepted Answer

Quoted-spread capture. The displayed spread is 30.04 - 30.00 = \0.04. On 1{,}000 shares that's 0.04 	imes 1{,}000 = \40. Add the rebates. You earned the maker rebate on both fills, the buy and the sell, at \0.0020 per share: 2 	imes 0.0020 	imes 1{,}000 = 0.004 	imes 1{,}000 = \4. Total round-trip capture: \40 + \4 = \44, equivalent to an effective spread of 4.4 cents even though you only displayed 4. The rebate is a real 0.4-cent-per-round-trip subsidy for providing liquidity. How tight could you go? Because the rebate pays you regardless of the spread, your break-even spread is lower th…

How maker rebates change your real edge

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