Exchanges, Venues, and Trade Routing

The same stock trades in many places simultaneously. US equities alone have more than a dozen exchanges and dozens of alternative venues. That fragmentation is deliberate policy, intended to force venues to compete, and it creates both cost and opportunity.

The venue types

Lit exchanges display their order book publicly. Price discovery happens here, and quotes are visible to everyone.

Dark pools do not display orders. A large institution can rest size without signalling its intention, which limits the market impact of a big trade. The cost is uncertainty: you cannot see what is there, and fill rates are lower.

Systematic internalisers and wholesalers are firms that fill client orders from their own book rather than sending them to an exchange. Much retail flow is handled this way, and the reason it is attractive to the internaliser is that retail flow is largely uninformed and therefore cheap to trade against. That is the adverse selection point from the other side.

What routing optimises

A smart order router decides where to send an order, balancing several things that usually conflict:

• Price: which venue shows the best quote.
• Size available: the best price for 100 shares may not be best for 10,000.
• Fill probability: a displayed quote may vanish before you arrive.
• Fees and rebates: venue economics differ substantially.
• Information leakage: routing a large order to a lit venue signals your intent.

The last is the subtle one and often dominates for institutional size. Showing a large order publicly invites others to trade ahead of it, so the observable cost of the fill is not the whole story.

Maker-taker, and why fees are not a detail

Most venues use a maker-taker model: adding liquidity with a resting order earns a rebate, taking liquidity with a marketable order pays a fee. Typical values are a fraction of a cent per share each way.

That sounds trivial and is not. For a market maker capturing a penny of spread, a two-tenths-of-a-cent rebate is a fifth of the gross edge. Fee optimisation is a meaningful part of profitability, and some strategies are profitable only because of rebates.

Some venues invert this (taker-maker), paying you to take liquidity, which attracts different participants and changes the composition of the flow.

Best execution

Brokers handling client orders have a regulatory duty of best execution, which is broader than best price: it accounts for likelihood of execution, speed, size and total cost. Firms must demonstrate their routing decisions serve the client, which is why routing logic is documented and audited.

What fragmentation means for a trader

Consolidating the picture is work. You need every venue's data to know the true best price, which is the national best bid and offer in US equities.

Latency arbitrage exists because of it. If venues update at slightly different times, a fast participant can trade on a stale quote at one venue using information from another. See latency.

Liquidity is spread thin. The same total volume split across venues means less depth at each, which raises impact costs for large orders and is a real criticism of fragmentation.