It used to be a standing joke about the online brokerage industry -- "if commissions keep falling, pretty soon the brokers will be paying you to place trades!" American Express experimented with free online trading (though it later had to restrict the program because too many customers were placing too many trades) and Ameritrade launched FreeTrade.com, which offers free market orders and $5 limit orders. More recently, FinancialCafe.com lowered its commissions to offer free market orders and $4.75 limit orders for customers with $20,000 or more in assets.
But the latest development makes the old joke sound prophetic. In late February, a direct access broker, Tradescape, began offering an innovative program to pay its retail trader customers up to $10 for each limit order filled on the firm's ECN, MarkeXT. The firm's "Get Paid to Trade" program provides a rebate of $0.01 per executed share in an attempt to stimulate the use of limit orders on the MarkeXT ECN.
Of course, Tradescape doesn't offer this incentive for purely altruistic reasons. The firm hopes to ultimately drive much more trading activity on its ECN, helping it to compete with the likes of Archipelago, Island ECN, and Instinet. Increased activity may help to create better execution prices for investors, though, and the greater volume could create more business on the ECN (and more revenues) from brokers and institutions.
Offering rebates to investors for order flow isn't a completely new idea. Datek rebates any payments for "order flow" that it receives directly back to investors, for instance. But the incentives offered by Tradescape are unique -- and even though traders still pay a commission, it's possible they could come out with a net gain after the incentive. Regular commissions at Tradescape are $1.50 per 100 shares, with a $7.95 maxiumum, plus any applicable ECN or exchange fees.
Tradescape says they are offering the program until further notice. Can they increase liquidity on MarkeXT enough to make the ECN a player? And can they draw enough day traders into their fold with the lure of incentives like these? If not, the joke's on them.
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