Forefront Communications

FlexAdvantage Blog: Equity Market Structure Wrestles with “Inaccessible Liquidity”

Sam Belden

Sam Belden

Equity market participants are learning about new stock exchange launches, new order types, and periodic auctions bringing innovation and competition to the equity trading landscapeBut concerns about the unintended consequences of retail orders being executed in the off-exchange world seemed to be a huge issue for buy-side traders at the STA 2020 Market Structure Virtual Conference last month 

Citing the concept of “inaccessible liquidity,” asset managers pointed to the surge of retail trading by mom and pop investors whose orders are executed by broker-dealers on private platforms 

While this phenomenon is not new, some institutional traders are worried that they cannot interact with this burgeoning source of retail liquidity. “I’m concerned about off-exchange liquidity,” said Melissa Hinmon, Director of Equity Trading for Glenmede Investment Management L.P.speaking on the panel U.S. Equity Markets Surveying the Future

“I don’t know how you can actually guarantee you are getting true price discovery when you have 25% of the volume in some names that we don’t have access to,” said Hinmon. 

The rise in individual investing in 2020 during lockdowns has led to “historically higher levels of dark trading as stocks are bought and sold on opaque private platforms rather than exchanges, reported The Wall Street Journal in August. In July, 43.2 % of U.S. stock trading volume took place off-exchange, according to data from Rosenblatt Securities provided to the WSJ

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