Rebate-aware routing and execution cost

The executable order as a fee-schedule choice

Editorial: decide whether the working interest is providing-liquidity or taking-liquidity, then sequence destinations so the rebate or charge is priced into implementation cost over the life of the order rather than treated as a back-office leftover.

Providing-liquidity meant posting a limit and waiting for another party to hit the bid or lift the offer. Venues historically paid a rebate for that posted size. Taking-liquidity meant aggressing displayed or hidden size by hitting a bid or lifting an offer.

Inverse-fee-venues and changing schedules

Some electronic venues used inverted fee schedules. An inverse-fee-venue paid participants for taking-liquidity rather than for providing-liquidity.

Rebate and fee amounts were not static. They varied with overall share volume and other factors.

How a smart-order-router sequenced destinations

A smart-order-router could ping rebate-paying destinations first, including selected dark pools, then continue to the next available site.

A dark-pool-improvement site could fill inside the entered limit by a stated increment or leave the order unexecuted so it moved to the next destination.

The same share could be routed to a destination that paid a small amount for the fill or to one that charged a larger take fee. Destination choice changed implementation cost even when the displayed price did not.

A consistent routing pattern was to park providing-liquidity on venues that paid for posted liquidity and to use taking-liquidity on venues that paid, or charged less, for taking it. Inverse-fee-venues belonged on that take path because they paid the remover of liquidity instead of the poster.

Pass-through and payment-for-order-flow

Retail treatment of these cash flows varied by firm. Many internalized flow, matched customers against one another, or sold order flow without pass-through of venue payments to the originating account.

That handling is payment-for-order-flow: the broker keeps the related cash flow. Pass-through would instead credit exchange or network payments to the originating account.