Scams for Sub $1.00 PPS Stocks Continues Unabated Harming Retail Investors Most

[Guest ValueCarl]

Exchanges charge fees to those that execute against standing buy and sell orders, something called a take fee, and pay rebates to those that provide standing orders that are executed against. This is known as "maker-taker" pricing.

 

While stocks are normally priced in penny increments, rules adopted five years ago allow exchanges to price sub-dollar stocks in one-hundredth of a cent. The fees and rebates, however, are based on penny increments for all stocks, including sub-dollar stocks -- which creates a possible loophole through which traders can earn out-sized rebates.

 

A trader can, for example, send a "limit order" bid through one brokerage account, and a corresponding "market order" to sell that same stock in another account. After trading with himself, the trader earns the bid's rebate and pays the smaller selling fee -- which is usually fixed at retail brokers like E*Trade -- and walks away with the difference.

 

In this scenario, market makers such as Knight would foot much of the bill.

 

For a short period earlier this year, large exchanges paid outsized fees and rebates in sub-$1 stocks, but did away with it in the spring after protests from market makers, said William Karsh, chief operating officer at exchange operator Direct Edge.

 

http://www.reuters.com/article/idCNN2623446220100926?pageNumber=1