How Much Toxicity Can the Rebate Buy?

Question

You quote a stock passively at a 1-cent spread (you sit 0.5 cents from mid on each side), and the venue pays a 0.25-cent maker rebate per share on every passive fill. What is the largest average adverse markout per fill (in cents per share) at which your passive quoting still breaks even?

Accepted Answer

Income per passive fill: half-spread versus mid plus the rebate: 0.5 + 0.25 = 0.75 text cents per share. Cost per fill: the markout, how far the price drifts against your position after you're filled (buys before drops, sells before pops). Breakeven is exactly where the two meet: boxed0.75 text cents per share of adverse markout Any flow more toxic than that loses money even though every single fill "earns the spread" on the tape. Why this number runs the business: 0.75 cents is your toxicity budget. Desks measure realized markouts per symbol, venue, and counterparty class and compare them to this budget: retail-heavy flow might mark out 0.2 cents against you (comfortably profitable), while flow on a fast-moving venue can mark out 1.5 cents (you're the exit liquidity). Same quotes, same fills, opposite businesses. Notice how much work the rebate does: it raises the budget from 0.5 to 0.75, a 50% increase in tolerable toxicity. That's why maker-taker economics decide where passive strategies can survive at all, and why losing a rebate tier can flip a marginal symbol from profitable to not. The trap: treating the full 1-cent spread as the per-fill income. You earn half the spread per

How Much Toxicity Can the Rebate Buy?

Problem

Your answer

Hints