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September 30, 2001

Novel Rebates Enter Online Market

By Sanford Wexler

Online brokerages are putting a new twist into the controversial practice of payment-for-order-flow.

In a sort of replication of how it is used to attract business in the dealer community, the online retailers are themselves offering rebates - as well as commission free trading - directly to their customers.

BrokerageAmerica, a New York-based subsidiary of market maker Andrew Garrett, is the most recent player. Another is New York-based Tradescape.

BrokerageAmerica, which routes orders to Andrew Garrett, is betting like others that the economic carrot will attract enough order flow to offset the cost of paying rebates and make the practice profitable. Andrew Garrett makes markets in 1,000 Nasdaq issues. The firm's chief executive, Drew Sycoff, said "the majority" of its revenue is from market making.

The retail payment for order flow strategy comes in a difficult market, said Greg Smith, an analyst at J.P. Morgan. "The economics in the industry are getting tight," he said. "Market makers are finding it tough to make money. You have to be able to consistently make money off of order flow." In the dealer community, wholesalers pay other dealers a rebate to send them order flow.