What Is An Inverted Exchange, And Why Should It Matter To You?

By: Spencer Israel

In their role as market facilitators, exchanges are responsible for ensuring there is enough liquidity for buyers and sellers, and that the pair are matched up efficiently and fairly.

One of the ways they’ve done this is by what’s called a “maker-taker” model, which has been around since 1997.

Exchanges- like the flagship New York Stock Exchange— will then profit on the difference between the fee charged to the taker and rebate paid out to the maker, though both are small. According to Tabb Group Founder Larry Tabb, rebates can range between $0.20-0.32 cents per 100 shares.

The argument for the maker-taker model is that it allows exchanges to reward market participants who create liquidity on their exchanges, which in turn creates more efficient markets. However, others have argued that it incentives brokers to prioritize higher maker-taker fees over trade execution quality.

This is where another alternative comes in: the inverted model.

The Difference Between an Inverted Exchange and Regular Exchange
In an effort to compete in what has become a crowded field, some exchanges have offered an inverted model. On an inverted exchange, such as CBOE EDGA, BATS BYX, or Nasdaq BX, the maker-taker model is flipped to a taker-maker model. In other words:

  • Exchanges pay rebates to any broker or market maker that executes a trade against one of those standing bids or asks—as a reward for taking liquidity out of the market.
  • Exchanges collect a fee from any broker or market maker that posts open bids and asks on the exchange as a penalty for providing liquidity.

Nasdaq was the first exchange to try this model in 2009, and in the ensuing years most major exchange companies have begun offering inverted exchanges as an alternative pricing model to win new business. In 2017 Intercontinental Exchange—owners of the NYSE—was said to be considering following suit.

Why Inverted Exchanges Matter to You
Though inverted exchanges are smaller than their non-inverted counterparts, they have been gaining in market share over the past decade despite the relatively lower liquidity on these markets.

Why? Because the traders that are participating in the market want those rebates.

This is where you come in. Studies have found that inverted exchanges have become the first venue of choice for retail trades, as retail brokers seek out rebates for their client orders. Only if the order can’t be filled on an inverted exchange will it be routed to a maker-taker exchange.

Active Trading with Lightspeed
Lightspeed, a division of Lime Brokerage, provides active traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.

For more information on a professional trading platform with Lightspeed, please call us at 1-888-577-3123, request a demo or to open an account.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

You may also be interested in...

The IPOX® Week, October 18th, 2021
Read More
4 Bad Habits That Stock Traders Should Break
Read More
Understanding the Difference Between Option Volume and Open Interest
Read More
The IPOX® Week, October 11th, 2021
Read More

Try the demo

Compare Platforms
Check the background of this firm on FINRA's BrokerCheck

Our website uses cookies to improve the performance of our site, to analyze the traffic to our site, and to personalize your experience of the site. You can control cookies through your browser settings. Please find more information on the cookies used on our site in our Privacy Policy. By clicking OK, you agree to allow us to collect information through cookies.