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Trading in Citi Is a Whole Sub-Industry

Wednesday, 19 Jan 2011 | 1:20 PM ET

Citigroup, a day after its earnings, again trading 300 million shares after the first hour-and-a-half of trading.

The trading in Citigroup has become an entire sub-industry of trading. There are thousands of traders making a living on Wall Street doing nothing but trading Citigroup stock.

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Why? A low-priced, high volume stock offers a perfect opportunity to profit two ways: 1) playing the spread, and 2) rebates.

Let's say a trader is bidding (seeking to buy) $4.83 for Citi, then offering (seeking to sell) at $4.84. If he can successfully complete that deal, he makes a penny — or $10 on a thousand-share order. You can do that all day long and make money, but it isn't always so easy.

This is where rebates come in. Most exchanges offer rebates to traders who provide liquidity. So if you have a low-priced stock, like Citi, and can trade it over and over again all day, you can collect a rebate in addition to any profit you make from playing the spread.

How much can you make? The amount of the rebate varies, but 15 mils per share is typical (that's 15 one-hundredths of a penny). So if you can trade a million shares of Citi a day (it typically will trade over 150 million shares a day), you can collect $1,500 a day. That's in addition to any money you make playing the spread.

By the way, you get paid if you offer liquidity. So if you get hit on a bid, you get a rebate. If your offer gets taken, you get a rebate. You can get a rebate on both sides.

This means you don't always have to make money playing the spread. In essence, it's the rebate that's driving the trading game.

Why is this done? This game — a variation on paying for order flow — has been much criticized, but with over 40 venues to trade on, it is now an essential element to attract liquidity to exchanges.

By the way, the exchanges give rebates for all stocks, not just Citi. But the low price and high volume of Citi has made it especially attractive for those seeking to profit from rebates.

How long has this been going on? Well, it started about 20 years ago, when an ambitious guy started offering rebates on the Cincinnati Stock Exchange.

That guy's name was... Bernie Madoff.

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Where Citi's Peers & Rivals Stand:

Bank of America

JPMorgan Chase

Goldman Sachs

Morgan Stanley

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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