Rebate Trading Definition

Rebate Trading is the act of buying or selling short a stock directly from an Electronic Communications Network (ECN) and receiving a rebate from the ECN for the transaction.  Rebate trading is mostly used by day trading as the transaction can list for seconds.  The rebate trader hopes to make money off the rebate provided by the ECN, instead of attempting to make money solely on the price movement of the stock.  The rebate trader must first look for a stock that trades with high volume.  This ensures the day trader will be able to purchase or sell short a large number of stock without moving the price.  The rebate trader receives a rebate for buying from the ECN, on the order of $2.5 per thousand shares purchased.  Once the trader is up on their position, even by a cent or two, the trader will close out the trade, and take the small profits from the stock, as well as the rebate from the ECN.  Most ECNs require that day traders maintain a minimum amount of trading activity in order to trade on their network.  Unlike retail brokers, ECNs will also negotiate their rebate rates on a case-by-case basis instead of flat rates.