Can the maker rebate make a losing quote profitable?

Question

An exchange pays a maker rebate of \0.0020 per share for posting resting liquidity. You quote deep in the queue at the same price as everyone else, so you capture essentially no spread edge, and your fills suffer adverse selection worth about \0.0015 per share. You trade 2{,}000{,}000 shares a day this way. Is this strategy profitable, and what is its expected daily P&L?

Accepted Answer

Add up the pieces of expected P&L per share: - Spread captured: \approx \0.0000 (you're just matching the inside price, no edge from the quote itself). - Adverse selection: -\0.0015 (the price drifts against your fills on average). - Maker rebate: +\0.0020 (the exchange pays you to provide liquidity). \mathbb{E}[	ext{PnL per share}] = 0 - 0.0015 + 0.0020 = +\0.0005. Positive, half a mil per share, purely because the rebate (\0.0020) exceeds the adverse-selection cost (\0.0015). This is "rebate capture": a strategy that would lose money on spread-and-adverse-selection alone is turned profitab…

Can the maker rebate make a losing quote profitable?

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