Day trading is getting cheaper.
Tradescape, a leading day-trading firm, has begun paying its retail customers one penny per share for certain orders that are placed and executed over its electronic trading network, MarketXT. The move was meant to boost revenue and build network traffic, company officials said.
If a customer trades 1,000 shares, he or she pays a $7.95 commission, but receives $10 back — a net profit of $2.05, said Omar Amanat, chief executive of Tradescape.
The refunds apply only to limit orders — orders to buy or sell at a specified price and quantity — and only to limit orders with prices that fall between the current best offering and selling prices for a stock.
The standard trading practice is to charge customers extra for limit orders, Amanat noted. Thats because they might take more work to execute. But an order that falls between the bid price and the asked price becomes the best price on the market and is likely to draw additional traffic to MarketXT.
"This is another example of the price wars where people are paying you to trade," said Larry Tabb, an analyst at Tower Group, a financial consultancy.
But to date, such rebates have gone to broker dealers and not retail traders.
Tradescape profits by charging institutions or dealers that fill the orders 0.5 cents or 1.5 cents per share. "We will make money on the transaction," Amanat said.
He admitted the aim was to drive business to MarketXT, which is much smaller than Instinet or The Island ECN, the two major electronic communications networks.
More than 300 million shares are traded through Tradescape, but only 5 million are handled by MarketXT, said Robert Sobhani, securities analyst at Bank of America Montgomery Securities. Almost 60 percent of Tradescapes orders are market and not limit orders, and it remains to be seen how willing traders will be to use limit orders to save a few dollars, he added.
"When you do a market order, you want to sell or buy at whatever the price is, not wait to have someone work on a limit order," Sobhani said. "Still, overall, this is a good idea. It is very innovative."