- Market structure is increasingly being shaped by fragmented liquidity channels and strategic control over data, speed and who has what connectivity:
- 78% of all respondents to our study expect bilateral trading to increase as a result; and;
- 100% of sell-side respondents interviewed anticipate a further decline in equity trading on a Central Limit Order Books (CLOBs).
- The majority of buy-side remain dependent on an unsustainable legacy model where the sell-side absorb their connectivity costs and act as the primary access point to liquidity:
- As bi-lateral trading takes a greater market share, reduced commissions and rising infrastructure costs are straining the traditional sell-side subsidy model. Smaller buyside firms are having connectivity solutions withdrawn, creating a two-tier access framework favouring higher-volume clients.. 89% of sell-side respondents state that a client’s commercial viability now determines whether connectivity continues to be subsidised.
In the first of a Series of three short reports titled, Markets Unstructured: The Importance of Connectivity in the Reinvention of Markets, research by Market Structure Partners (MSP) reveals that declining use of CLOBs is expected to accelerate and that equity markets are now exhibiting signs of “bondification”: orders that once interacted transparently on lit books are increasingly executed bilaterally. Retail and Institutional investors increasingly want access to a variety of cross-asset liquidity channels but the barriers to achieving this are rising.
The background to the Study is a change in market structure attributed to a lack of central governance over data quality that has left issuers and investors with little confidence in the traditional exchange model, once valued as the gatekeeper of market integrity. The benefits have accrued to only two groups of participants, both of which have had the greatest impact on the reinvention of markets:
- Traditional Exchanges, which have been allowed to separate data from the trading activity that it underpins and sell it as a separate commodity. This has sustained the frictional costs of trading borne by investors in a competitive environment and, instead of reinvesting the revenues from data in equity markets (as proved in MSP’s There’s No Market in Market Data Report, 2025), most exchanges appear to have used the profits to invest in other non-equity businesses. It has also caused asymmetries in access to other CLOB data, undermining lit markets and preventing alternative trading platforms, who were more willing to invest in equity markets, from being fully rewarded for their efforts.
- Electronic Liquidity Providers, which have used the power of technology to clean and store the data for their own use and then have found themselves further benefitting from data asymmetries created when markets fragmented. This has allowed them to build strong balance sheets, meaning they can now face the buy-side directly. They have stepped into the vacuum of underinvestment in CLOBs and data and now offer bi-lateral trading platforms where their data is free and customers have greater certainty of execution than on a CLOB. However, full reporting of their data relies on voluntary use of standards, further reinforcing the likelihood of more data asymmetries as their market share increases.
Consequently, a new class of market “gatekeepers” is emerging - firms with the economic power and infrastructural control to determine access to liquidity, dictate the terms of participation, and shape the degree of transparency, often within wholly discretionary frameworks. This reflects a structural realignment: control over data, trading infrastructure and balance sheet capacity is concentrating among actors that now operate as de facto arbiters of market access and price formation.
Connectivity - the infrastructure of interfaces and telecoms pipes that transmit, process, and display high-density message traffic between market participants and liquidity channels has now become systemically important. Once regarded as simply operational plumbing, paid for by the sell-side so that buy-side firms and retail investors could route orders to them for onward routing to a market, it is morphing into core market infrastructure, the control and development of which is critical for market integrity.
Yet the economics of the current connectivity model is under threat. Legacy services that were developed in asset silos for routing to a handful of trading venues, when sell-side order routing and membership of a venue was a valued commodity for which the buy-side was willing to pay commissions, are becoming less relevant in an increasingly multi asset environment where multiple liquidity pools exist, and membership of a venue is of little significance because no single venue is the arbiter of market integrity. The buy-side are increasingly facing ELPs direct but have no control over the data they receive.
Sell-side firms can no longer justify sponsoring buy-side connectivity without the guarantee of significant trading flow to generate commissions. As a result, the buy-side must start to take responsibility for developing their own access to a growing number of dispersed liquidity pools, an expenditure that they have previously not had to bear. The Holy Grail for the future growth of markets is low-cost, state-of-the-art, multi-asset connectivity with high quality data.
This first paper will be followed by a second paper that shows the paths the buy-side are exploring for connectivity solutions, and a third paper that recommends required industry actions to maintain market confidence and support the transition.
Niki Beattie, CEO of MSP and one of the authors of the report comments “When trading became a competitive environment, policymakers forgot to ask themselves the question as to who, or what body, would ensure total market integrity. As a result, data quality deteriorated and issuers and investors became disadvantaged. Benefits accrued to only a handful of participants who are responsible for a fundamental shift in the market ecosystem, away from Central Limit Order Books to a proliferation of bi-lateral liquidity channels.
As markets reinvent themselves, policymakers need to shift their focus to ensure that issuers and investors have access to resilient and broad connectivity channels to as many liquidity pools as possible at the lowest possible cost, along with a data set that ensures market integrity. Significant challenges exist to overcome this, but if they are not addressed market integrity will continue to breakdown.”
Rebecca Healey, also one of the authors of the report said: The next stage of market evolution will be shaped less by individual venues or protocols and more by how connectivity is structured, governed, and financed. As connectivity becomes an integral component of market structure, rather than a neutral layer beneath it, its design increasingly reflects shifts in policy, technology, and incentives.
The main challenge with delivering the new trading requirements is that the connectivity infrastructure needed to support them continues to be funded by brokers – even as those brokers increasingly see less of the flow that they pay third party vendors to access. That economic model is already failing. The legacy “connectivity club” - broker-sponsored access, order routing to self-regulated CLOB monopolies, and the use of proprietary interfaces – was also not designed for an environment in which AI is extending electronic workflows into historically voice-based, multi-asset markets moving at increasing speed.” A copy of the Paper I report is attached.
