An Analysis of US Equity Market Structure

In a post-Regulation National Market System (NMS) world, one unintended consequence is the rise of market fragmentation.

Perhaps there is too much fragmentation as there are now 16 exchanges, 33 alternative trading systems (ATS), and multiple over-the-counter (OTC) venues. This forces traders to balance the likelihood of certainty of execution against potential price and size improvement and other transaction costs when choosing an execution venue. As such, this has complicated U.S. equity market structure, leading market participants to wonder if changes are necessary.

In two new reports, we analyze top of mind trends for equity market structure experts.

Why Market Structure and Liquidity Matter

Market structure can drive liquidity and trade costs. Therefore, market participants continually strive to create the most efficient markets. This includes adapting new technologies to achieve operational efficiencies, searching for new ways to transact and, generally, sculpting market structure to maximize efficiencies. Market liquidity is the ability to efficiently buy/sell securities without causing a substantial change in the price of the asset and is important as it impacts trade costs and therefore affects returns to investors. When routing an order, whether directly to an exchange or executed off-exchange, firms balance likelihood of execution against price/size improvement. Market makers exist to provide liquidity in securities and execute trades, playing an important role in equity market structure by enabling the smooth flow of markets.



Analyzing the Meaning Behind the Level of Off-Exchange Trading

Reg NMS had several unintended consequences, including the rise in off-exchange trading. While this aspect of market structure may have changed, it is not necessarily a bad thing. It is a function of market structure and will shift based on current characteristics. There have been many discussions lately about the increase in the level of off-exchange trading as a percent of total equity volumes in the U.S.  The level reached 41.5% in 2020 and is at 44.2% YTD 2021 (through July 30), representing increases of 4.7 pps and 7.4 pps respectively versus the historical average (36.8%). This report analyzes the data behind the numbers, as well as presents alternative views to measure the level of off-exchange trading. Additionally, we look at these figures as related to retail trading and market quality.



Katie Kolchin, CFAKatie Kolchin, CFA is Director of Research for SIFMA. A global equity research analyst with a background in market infrastructure and capital markets, she leads the team performing data and analysis work for the Association and is the author of SIFMA Insights.

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