Many trading venues, both lit and dark, employ what is known as a “maker-taker” model of payment for order flow. In offering a small rebate to those providing liquidity and charging one to those taking liquidity, venues can incentivize participants to use their exchange.


High frequency traders employ techniques to take advantage of these rebates, often buying and selling shares for the same price in order to make money on the arbitrage of rebates. This process can distort true price discovery of assets, one of the (if not the) fundamental reasons trading markets exist.

Recently, Professor Larry Harris of USC Marshall School of Business, published a paper to this effect. While some questions surround the validity of data used (public feed vs. direct feed), the concerns raised are just as sound. In addressing the topic, Themis Trading posted a real-life example of HFT distorting price due to the maker-taker rebates in effect. Keep in mind the business model of Themis is that of an agency broker. They are likely executing orders on behalf of large funds that could include your pension or 401k. While this example seemingly worked in favor of the “traditional” investors, it’s safe to assume this is not always the scenario, and it still speaks to the broader dislocations caused by HFT and the payment for order flow model.

We were buying a large number of shares of a large cap tech company that trades tens of millions of shares per day. During one stage of the order, while we trying to feel the real supply and demand of the stock (the stock was “heavy”), we were bidding manually for the stock on several exchanges at 39 cents. Of course, the real data feeds quickly had us pegged as NOT being market-making computer flippers – or rather as static slower order flow – or “takers”. The NBO quickly built up large at 40 cents– knowing that there was a high probability of the “taker” – us – taking their 40 cent offers, which would earn them a 33 mil rebate.

However, we knew the stock was heavy, despite the 40 cent sellers not willing to hit our 39 cent lone bid, as they did not want to incur a take fee. So we canceled and replaced to 38 cents. They adjusted to size offered at 39 cents.  Again they would not hit our 38 cent bid and incur the take fee. We adjusted to 37 cents. And then 36 cents. And then 35 cents. All the while they adjusted their sizeable offers downwards – they would rather sell stock at 36 cents and get a rebate, rather than sell it at 39 cents and pay a take fee. How is that for price discovery?

We took their 36 cent offering, incidentally, and cheerfully paid our take fee.