Effects of Market Fragmentation

Terry Flanagan

Increasing fragmentation does more than just create competition among trading venues.

Market observers note that market fragmentation makes it harder to find liquidity, as it becomes spread out over more than 60 equities venues, spanning exchanges, alternative trading systems and at the trading desks of broker-dealers. Regulators have also expressed concerns that it makes it harder to conduct market surveillance and prevent manipulation and abuse.

With liquidity spread out between venues, one of the options is to send orders to all of them.

PDQ ATS, an alternative trading system aimed at high-speed algorithmic traders, recently added new functionality to its existing smart order router, called parallel posting. It allows traders to co-locate passive orders at multiple venues, which automatically rebalance depending on which venue is able to execute the order.

“It’s like a heat sensor guided order, it will auto-rebalance to whatever venue the stock is trading on,” said Keith Ross, chief executive officer of PDQ. “If you have an order for 10,000 shares you want to buy, we would put bids for 1,000 in 10 different venues. As soon as one starts trading, then the orders at the others would rebalance and shift to where it’s trading.”

In November, PDQ launched a new auction model, which it said is the first of its kind in the high-speed equity trading landscape. The auction system works through an “electronic algorithmic crowd” competing for orders.

Brokers face the possibility of writing for a few new venues later this year in the form of two exchanges to be based in Miami. New Jersey-based Miami International Holdings is planning on introducing the Miami International Options Exchange in the first part of the year, with the Miami International Stock Exchange to come later on. Pending regulatory approval, Miami International Options Exchange would be the tenth options exchange in the U.S., while Miami International Stock Exchange would be the 14th equities venue. On top of the 50 or so alternative trading systems, as well as the internalization that occurs at brokerages, there are a slew of venues where trades get matched.

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