It’s Not A Rebate!


There seems to be a discrepancy within the industry as to the difference between a “rebate” and a “discount”. A quick google search produces these definitions:

Rebate – a partial refund to someone who has paid too much money for tax, rent, or a utility.

Discount – a deduction from the usual cost of something, typically given for prompt or advance payment or to a special category of buyers.

In other words, rebates involve cash being sent back to someone while a discount is a reduction of a fee that is still charged.

Last week, IEX announced a new incentive program for market makers that are quoting in soon-to-be IEX listed stocks.  The word “incentive” seems to have worked up some well-known IEX critics and they immediately started saying that IEX, which has always been anti-rebate, would now be offering rebates.  But a closer look at the incentive program shows that what IEX is offering is a discount and not a rebate.  We were asked by the Financial Times our opinion of the new IEX pricing plan and responded:


Here is how their incentive program will work according to an IEX blog post :

The IEX Enhanced Market Maker (IEMM) Program offers a discount on trading fees to market makers when they meet stringent market making requirements in IEX-listed stocks with only their principal order flow (not that of their clients).

There are two tiers in our IEMM Program:

  1. Inside Tier — To qualify for the Inside Tier, firms must spend at least 20% of the trading day quoting at the National Best Bid and/or Offer for IEX-listed stocks. Said another way, the average of a firm’s time quoting at the NBB and NBO must be at least 20% per day.
  2. Depth Tier — To qualify for the Depth Tier, firms must quote within the greater of 1 MPV or 3 basis points of the NBBO at least 75% of the trading day. This tier is unique to the IEMM Program.

IEX is required to have at least three market makers in the stocks they list and they would like these market makers to add displayed liquidity to the NBBO as well as more depth of liquidity.  To obtain the fee discount which is detailed above, market makers will need to add meaningful and consistent quotes. Since most exchanges offer rebates (over $2.5 billion last year) for displayed liquidity and IEX will still be charging a fee (even after the discount) to add displayed liquidity, it might still be difficult for IEX to win over this order flow. However, market makers may find this discount very appealing since it will be given to them for all securities (both displayed and non-displayed) they trade on IEX, not just the IEX-listed securities. This last point really seems to get the anti-IEX crowd upset since they are desperate to see IEX not succeed and this type of discount may help to jolt the IEX market share.

Since their inception, IEX has tried to create innovative solutions to market structure problems.  Their new market maker incentive program is consistent with this philosophy.  We think getting market makers to add more displayed liquidity without adding a new conflict to agency broker routers is a good thing and should be applauded rather than nit-picked by cranky, anti-IEX zealots.