Money 2.0 Stuff: Rebate stuff

The basic idea behind exchange rebates is that liquidity begets liquidity, but first, you have to have some liquidity, and that is hard. A rebate purportedly solves this Catch-22, typically by subsidizing market maker liquidity provision. Consequently, order books deepen and, ideally, a virtuous cycle commences that ultimately drives exchange revenue via increased taker-driven trading fees. 

Market maker rebate programs were pioneered in the 1990s with the advent and rise of electronic trading venues. By and large, there hasn’t been a huge amount of experimentation since. An exchange charges takers some percentage fee on each trade, some portion of that fee is distributed to market makers, and the remaining margin is booked as revenue. The model appears to work quite well, and the static nature of the fee-sharing agreement would appear to reflect that.

But perhaps there’s a better way?