Your panel focused on a range of market structure considerations, when it comes to fragmentation and multi-venue trading, what are the impacts on institutional investors?
Using data from US markets such as Nasdaq, S&P, and Russell, the last three decades have seen two broad strands of evolution.
Firstly, a massive increase in electronic order execution led to a market increasingly dominated by non-bank market makers which accelerated post-GFC. Coinciding with this automation was a big reduction in the tick sizes – also a function of electronic order execution which tends to favour smaller ticket sizes, executed in ever increasing speeds.
These two trends resulted in a market that is predominantly automated with reduced trading costs as spreads tightened – on average from approximately 100bps roundtrip to less than 10bps on most stocks. The progress was stalled by the SEC’s Regulation NMS (National Market System), as evidenced by the stagnation in bid-offer spreads since 2008.
Specifically, NMS was a regulator response designed to address three things. Firstly, market fragmentation, given the advent of dark pools and fragmented exchanges, it wasn’t easy to get a unified view of where the best price was to trade Google stock for example.
Market transparency was also an aspect, as dark pools operated by non-bank trading companies like Virtu, HRT and Citadel Securities have often been accused of extracting too-high economic rents from their market making activities.
Finally price improvement – by introducing a National Best Bid-Offer (NBBO), so a market maker is prohibited from showing clients prices that a worse than the NBBO.
The impact on institutional investors is that fragmentation tends to lead to a more complex trading execution environment, however as we see above, there are other market mechanisms, such as electronic trading, regulatory responses and venue consolidation that can still reduce unit trading costs for clients over time.
All this means that buy-side firms have had to become increasingly more sophisticated in how they execute – especially in markets that are requiring ever increasing fixed costs just to stay in business.
When it comes to liquidity access, what’s front of mind from the buy-side perspective?
Fragmented markets lead to higher fixed costs – even as the marginal costs of accessing venues decreases – as well as higher search costs, such as latency costs, signal costs) and physical infrastructure required to link to more than one venue.
So, while the liquidity improves from market evolution, the costs required to operate in this environment keep going up.
Looking across emerging markets, what market structure changes are set to be most impactful across 2026?
Increasingly companies in emerging markets have, or are considering having, dual listings – one in their home market and then one in a more developed market. This may affect where the shares of these companies are traded. If, for example, there is much better liquidity in a company’s shares trading in a developed market, then you may see local emerging market asset managers opting to shift their trading out of the more illiquid emerging market venue into the more liquid developed market venue.
Companies considering having dual listings would typically be the larger companies listed in emerging markets and providing an alternative trading venue for the company’s shares outside of the local emerging market, could have a profound effect on the overall trading liquidity of the emerging market.