Market Structure, Participants, and Trading Venues
The landscape
Know the main venue types and how they differ: lit order books, quote-driven or request-for-quote systems, dark pools and other non-displayed liquidity, systematic internalisers, and auction mechanisms including opening and closing auctions. Understand the roles of exchanges, alternative venues, clearing houses, central securities depositories, and data providers. Be able to describe the order lifecycle from entry to execution, confirmation and post-trade reporting.
Fragmentation and best execution
Fragmentation across venues creates both opportunity and obligation: the firm must have an order execution policy, monitor execution quality, and consider price, cost, speed, likelihood of execution and settlement, and size. Dark venues trade at or within the best displayed price (subject to reference price waivers) and exist mainly to reduce market impact for large orders.
Traps
- Treating a dark pool as a separate asset class rather than an execution method.
- Forgetting that auctions concentrate liquidity and set reference prices used elsewhere.
- Confusing a systematic internaliser (trading against own book on a client-by-client basis) with an exchange.
- Assuming the venue with the highest displayed quote is always the best execution outcome for a large order.
Worked example
A client wants to buy 2 million shares where displayed size is 200,000. Sweeping lit books gives immediate fills at rising prices; a block in a non-displayed venue may fill at the midpoint with less impact. The rule of thumb: for orders large relative to displayed liquidity, evaluate effective price including impact, not just the top-of-book quote.