Higher-Tier Exchange Rebates are the Carrot Which Prompted Gelber Group to Engage in Illegal Trading Activity



On Friday February 8th, 2013 the CFTC sanctioned Gelber Group LLC $750,000, and its former  trading manager Martin Lorenzen $200,000, for engaging in illegal trading activity. This trading activity included manipulating the open of the NASDAQ E-mini 100 futures contract, as well as illegal wash sales designed to inflate Gelber’s trading activity, so that the firm would achieve a higher tier of rebates from the Intercontinetal Exchange (ICE). Gelber Group LLC, according to their website, is a firm that highly values “creative freedom and a healthy appetite for risk.” Gelber is a high frequency trading firm, in which

“Trading prowess and command of cutting-edge technology enable Gelber Group to identify and exploit new trading opportunities in the global financial and commodity markets. The global financial markets become more competitive every day as new sophisticated participants enter the marketplace. Gelber Group understands the ever increasing technology demands required to be competitive in this automated industry.”

It is no wonder that the CEO of the Intercontinental Exchange (ICE), Jeffrey Sprecher, whose firm is merging with the NYSE Euronext, has come out swinging against the distortive potential of rebate maker-taker pricing mechanisms employed by all of the stock exchanges. He has witnessed first-hand how some HFT bad apples have used that system to keep afloat trading strategies and business models that should have died from an evolutionary and competitive standpoint a long time ago.

You see, the problem is that for the past several years, the stock exchanges solution for slumping volumes has been to ramp up their rebate structures to incentivize more volume from market makers and high frequency traders. This Trader Magazine article from September 2011, Sweetening The Deal, nicely exhibits the complexity of all of the stock exchange rebate structures in a nice chart, viewable here. Their solution collectively to address more and more off exchange volume, and slumping volumes, has been to further incentivize more activity from the very same high frequency players that arguably have been driving volume away from the exchanges and to dark pools in the first place. You would think that the stock exchange executives would see the forest through the trees!

We are happy that ICE’s Sprecher does. We admire his courageous stance, and believe that overhauling the maker taker rebate system would be an outstanding first step to getting markets to be healthier, with broad diverse participation, and pricing that most accurately reflected the value of the underlying assets.