Is Venue Fragmentation the Enemy of Innovation? With New Venues Come Old Challenges

The growth of trading venues has reached a tipping point where industry professionals are questioning whether innovation has given way to counterproductive complexity. Although the issue of venue fragmentation is not new, it is beginning to escalate.

According to a report by EY, "The challenges that firms are trying to address include establishing a consistent definition of a trading venue, creating or updating fragmented or outdated Trading Venue Inventories, and demonstrating venue data quality and completeness.

Firms also struggle with "the surveillance coverage (including effectiveness) for these venues across products, regions, lines of business (LOBs), and market misconduct risks,” the report said.

At the 2025 Equities Leaders Summit, speakers voiced mounting concerns about venue overload, inconsistent liquidity patterns, and the persistent absence of comprehensive market transparency.

The Venue Proliferation Problem

Timothy Reilly, Senior Director of Markets at the New York Stock Exchange, captured the industry's growing unease during the liquidity sourcing panel when he asked, "When does segmentation go too far? How much are we going to slice and dice products and venues? When do we start to lose?"

His question reflects a broader anxiety among market participants who are struggling to navigate an increasingly fragmented landscape.

The numbers support these concerns. According to recent data from Cboe, off-exchange venues now execute nearly 30% of all U.S. equity volume. Trade Reporting Facilities captured 44.97% of overall market volume as of July 2023, with some market segments seeing even higher fragmentation rates.

This proliferation has created what industry professionals describe as a "plethora of new order types and venues," as Jeremy Smart, Global Head of Distribution at XTX Markets, acknowledged during the summit panel.

Transparency Breakdown in "Hosted Rooms”

The rise of private and segmented trading arrangements has intensified fragmentation concerns. Noel Reyes, Head of America Electronic Trading Product at Goldman Sachs, explained how segmentation can be used effectively:

"Most segmentation today is well documented and understood, and it’s public information—as long as that’s the case, there’s a healthy and responsible way to use segmentation.

However, he also expressed particular worry about the lack of transparency in these new venue models:

"The idea where two individuals meet up in a ‘hosted room’ just to see what happens… that worries me to some extent. There’s no real documentation around any of it, so I think there are a lot of questions about whether we can go about this in a sustainable and transparent way.”

Reyes believes the opacity creates uncertainty about counterparties and trading conditions in such private spaces, undermining the predictability that institutional traders need for effective execution.

"We need to take a hard look at some of the decisions we’re making,” he said. "As an industry, we don’t want to be in this room five years from now realizing that we made some big mistakes and the market is more opaque than it needs to be.”

Liquidity's Fragmentation Challenge

The multiplication of venues has created what experts call "liquidity fragmentation," where market depth becomes dispersed across multiple platforms rather than consolidated in central locations. According to the World Economic Forum in January 2025, "the potential cost of global financial system fragmentation, or the increasing disintegration of the interconnected global financial landscape into distinct blocs, ranged from $0.6tn to $5.7tn.”

While bid-ask spreads have narrowed, market depth has decreased as trading spreads across venues. This creates a paradox where quoted spreads appear attractive, but the actual cost of executing larger orders may be higher due to reduced depth at each venue.

The absence of a real-time consolidated tape compounds these challenges. Unlike other major markets, the U.S. equity market lacks a unified view of trading activity across all venues, making it difficult for participants to assess true market conditions. According to an analysis by SIFMA, "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.”

This fragmentation fatigue represents more than operational inconvenience—it signals a fundamental tension between innovation and market efficiency that the industry must address as venues continue to multiply.

Venue Analytics and the New Art of Liquidity Profiling

Nonetheless, organizations are innovating to create more transparency. The complexity of the fragmented market has given rise to sophisticated venue analytics that go far beyond simple performance scorecards to provide more comprehensive liquidity profiles.

Robert Miller, Head of Market Structure & Liquidity Solutions at Kepler Cheuvreux, explained more at Equity Leaders Summit 2025 during a panel discussion about liquidity sourcing.

"There's no such thing as bad liquidity. It's just a bad execution strategy,” he said.

"You need to understand your client’s workflow and objectives and then determine how you can implement them into your liquidity sourcing. We examine the orders and characteristics, then compare what could happen if we go to different venues. This way, we identify many different liquidity sources, and each one gives a different outcome.”

This insight captures the fundamental shift occurring in how traders approach venue selection: Rather than labeling venues as universally good or bad, the focus has moved toward understanding how different venues perform across distinct trading intentions.

Moving Beyond Aggregate Performance Metrics

Traditional venue analysis often suffered from oversimplification—comparing venues based on weighted average costs or broad performance metrics that obscured crucial nuances. This approach, as Jason Siegendorf, Head of Trading Analytics at Harris Associates, discovered when transforming his firm's trading approach, fails to grasp the bigger picture.

"When I first started working with TCA, the main focus was always on the outliers—portfolio managers would ask about their top three unusual trades and why they happened,” said Siegendorf.

"But that meant ignoring almost all the other trades. So, I worked to move the conversation away from just outliers and toward looking at the entire range of trading results. I wanted us to understand how trading behaviors shape these outcomes, and how we could influence the overall distribution to achieve better results.”

Instead of chasing outliers, Siegendorf's team shifted toward understanding entire distributions of trading outcomes. This distributional approach reveals patterns that aggregate metrics mask, showing how venue performance varies across different order characteristics, market conditions, and execution strategies.

Intent-Based Venue Profiling

This granular approach has led to what industry practitioners call "intent-based” venue analysis. Miller explains the concept:

The framework categorizes venue interactions based on specific trading intentions:

• Liquidity provision (resting orders to capture spread)
• Liquidity consumption (taking available liquidity for immediate execution)
• Midpoint seeking (accessing liquidity at the bid-ask midpoint)
• Block discovery (finding large-sized counterparties)

Each category faces different performance dynamics and risks. Liquidity provision tactics face adverse selection risks—the danger of being picked off by better-informed counterparties. Liquidity consumption tactics, while offering execution certainty, create market impact. Midpoint strategies balance these concerns but depend on counterparty availability.

By segmenting venue analysis across these intentions, traders gain actionable insights. A venue might excel at midpoint matching while showing poor performance for liquidity provision. Understanding these distinctions allows for more sophisticated routing decisions that optimize outcomes for specific order types.

Looking to 2026: What to Expect from Regulations

As we look to 2026, the question remains whether global regulators will move toward more unified rules for trading venues that could address issues of fragmentation, lack of transparency, and risk. Currently, innovators are deploying new solutions to improve transparency. However, efforts at harmonization on the regulatory front face political and strategic barriers that make widespread alignment unlikely.

For example, in June, the SEC withdrew 14 notices of proposed rulemaking issued between March 2022 and November 2023. The proposed rules would have impacted areas like investment management, trading markets, and corporate finance. Officials say this is just one part of current efforts to deregulate the financial sector, which suggests that additional regulatory shifts are on the horizon.

Furthermore, diverging standards between major markets are likely to persist, and firms will need to adapt to local rules and design flexible operating models to manage complexity. While true harmonization seems distant, more structured fragmentation could bring some predictability.

Equity market participants should prepare for continued change rather than clarity.