The growth of competing exchanges and alternative trading venues has made institutional execution more complicated, not necessarily more efficient, according to Aaron Kehoe, Head of QwickRoute, MCAP LLC’s auction-based execution and market data platform.
“We believe exchange competition has increased complexity meaningfully. While having more than 50 exchanges, ATSs and single-dealer pools may sound like it should improve access to liquidity, the reality is that it has created new challenges,” he told Traders Magazine.
Kehoe said liquidity fragmentation has forced institutional investors to make increasingly complex decisions around where and how to route orders in order to achieve best execution.
“Liquidity is fragmented across dozens of venues, forcing institutional investors to determine where and how to route each order to achieve the best execution,” he said.
Kehoe said fragmentation has also increased challenges around information leakage and created a greater focus on execution speed.
“That fragmentation has made execution more complex and, in some cases, increased the risk of information leakage as orders are exposed across multiple venues,” he said.
“It has also created an unnecessary emphasis on speed, with firms racing to find liquidity as quickly as possible rather than focusing on the quality of the execution itself,” he added.
According to Kehoe, the focus for institutional investors should be on identifying the most appropriate liquidity rather than simply executing as quickly as possible.
“In our view, the challenge isn’t simply finding liquidity – it’s finding the right liquidity, at the right price, while minimizing information leakage,” he said.
“That’s where smarter execution workflows and technologies can make a meaningful difference,” he said.
Kehoe said this shift is also prompting the industry to reconsider how it defines best execution.
“Fast execution and best execution don’t necessarily equal each other, but they seem to have become interchangeable in the current market structure,” he said.
Kehoe said the industry is increasingly reconsidering whether speed alone should be the primary measure of execution quality.
“Too often, the assumption is that if an order is executed quickly, it has also been executed optimally,” Kehoe said. “Fast execution and best execution don’t necessarily equal each other, but they seem to have become interchangeable in the current market structure.”
Kehoe said one of the biggest challenges created by fragmented markets is determining where each order should be sent.
“The biggest challenge fragmentation creates is knowing where to send each order. With liquidity spread across exchanges, ATSs and dealer pools, institutional investors must determine where they are most likely to achieve the best execution by not just finding liquidity, but also finding it at the best price,” he said.
He said the decision increasingly depends on technology that can evaluate available opportunities and determine whether to execute immediately or continue searching for improved pricing.
“The question isn’t simply whether liquidity exists; it’s whether to execute against the first available opportunity or continue searching for better pricing or additional liquidity elsewhere,” Kehoe said.
“That decision increasingly depends on smart routing logic and technology,” he stressed.
Kehoe said buy-side firms are under pressure to improve execution efficiency while managing increasingly complex markets with limited resources.
“Broadly, the expectation is that the buy-side wants to achieve more with less,” he said. “Trading teams are expected to execute more efficiently, source liquidity across an increasingly fragmented market, and demonstrate best execution, all while operating with limited resources.”
Kehoe said these pressures are creating demand for technologies and workflows that can simplify execution processes while improving access to liquidity.
Artificial intelligence is also becoming part of the conversation around execution technology, according to Kehoe, who said AI can help firms analyze market and order data at greater scale and identify opportunities to improve execution quality.
“We are seeing AI enable more scalable analysis of market and order data, helping identify new opportunities to improve execution quality. We believe AI tools will be part of a suite of improvements that can create a more streamlined trading process,” he said.
Looking ahead, Kehoe said one of the biggest market structure changes will be a move away from traditional indication-of-interest (IOI) workflows toward models designed to encourage liquidity providers to compete directly for orders.
“One of the biggest shifts will be moving away from traditional indication-of-interest workflows, where non-firm advertisements often drive order routing decisions,” he said.
“We believe the industry is moving toward more intentional and efficient workflows that invite liquidity to compete for an order, rather than having liquidity chase the order across fragmented markets,” he said.
“That approach has the potential to improve price discovery, reduce information leakage, and ultimately deliver better execution outcomes for institutional investors,” he concluded.
The image for this article was generated using AI.
