How Does the Fragmentation of Liquidity between Dark Pools and Lit Markets Affect Overall Market Quality?

Liquidity fragmentation describes the splitting of trading volume for the same asset across multiple venues, including lit exchanges and dark pools. While it can foster competition between venues, it can also harm market quality.

Fragmentation can reduce the accuracy of price discovery on lit markets, as a significant portion of trading interest is hidden. It may also lead to wider bid-ask spreads and increased costs for investors trying to piece together liquidity from different sources.

Smart order routers are essential tools for navigating this fragmented landscape.