Rebate Capture

Rebate capture is a trading strategy where market participants place passive limit orders to earn liquidity rebates offered by exchanges. Exchanges incentivize market makers to provide liquidity by paying them a small fee for every order that adds to the order book and is subsequently filled by a taker.

The strategy involves calculating the probability of the order being filled against the cost of the rebate and the risk of adverse selection. Traders often use high-frequency algorithms to manage these orders, ensuring they remain at the top of the order book.

This practice is essential for maintaining tight bid-ask spreads in both traditional and crypto markets. However, it requires sophisticated technology to compete with other market makers.

The primary goal is to accumulate these small, consistent rebates as the main source of profit. It is a fundamental component of market microstructure that ensures efficient price discovery.