An amazing milestone was reached in 2025: this was the year when off-exchange market share rose above 50%.
But looking at price discovery during the day, lit trading is even lower.
Interestingly, we found that the market is darkest in the middle of the day.
Lit price discovery drops to 30% of sustained trading
There is a lot of price discovery during the day – while traders are working on large orders looking for liquidity – and the economic news is fresh.
We have previously seen that off-exchange market share is now over 50%. But if we look at the tape during the day, we see that the percentage of lit trades is even lower. In fact, less than a third of all volume intraday comes from venues published in the National Best Bid and Offer (NBBO).
Chart 1: In continuous trading, the darkness is even greater when price discovery occurs
Interestingly, the light gray shade shows the proportion of trades on the exchange but at prices that are not on the SIP. It includes a lot of midpoints, but also odd ones. This also suggests that investors who prefer exchanges because of their ability to attract liquidity also still prefer to remain “hidden.”
It is darkest in the middle of the day
We can also look deeper to see if the hidden trading levels change throughout the day.
Data shows that traders rely more on quotes published at the beginning and end of each day. Therefore, it is darkest in the middle of the day.
Chart 2: The proportion of exchange trades is lowest in the middle of the day
Interestingly, however, the proportion of “Lit” trades (exchange trades on the NBBO) is less variable – starting at around 30% in the morning and not really increasing until 3:30 pm Eastern Time. This is possible when certainty of hitting a published quote becomes a more important factor for traders as the end of the day approaches.
What about that “tipping point”?
Academics have thought for years that 50% off-exchange represents a “tipping point”, where the NBBO no longer rewards price setters and price discovery declines. The reason for the decline of NBBO is explained by cream skimming research.
- The most profitable spread-crossing trades are routed to off-exchange venues (by offering price correction, PFOF or tiering).
- Focusing on less profitable spread-crossing trades in fair access (LIT) markets.
- Because price setters in lit markets actually need to capture the spread, they will need to increase the spread to make up for the lower rate of spread capture on NBBOs.
If we listen to academics, the trends we have seen over the past 20 years are unlikely to reverse now.
The implication is also that NBBO is now perhaps more widespread than it should be.
what does all this mean
This is part of a 20-year trend, not a short-term trading pattern. So, it’s most likely due to economics.
We have previously highlighted how exchange orders are competing on an uneven playing field. Off-exchange venues are able to segment and sometimes trade off-tick, making it easier to capture spreads from less toxic flows, while exchanges must provide access to all. This, in turn, makes providing quotes on the exchange less attractive, leading to wider quotes and, as a result, a self-satisfying cycle of increased off-exchange trading.
We’ve even found that these economic differences allow less toxic places to charge more for business.
Furthermore, SIP accounting may actually subsidize off-exchange locations.
It is difficult to expect improvement in lit trading under such adverse conditions.
The risk is that all this leads to less competitive quotes, then higher trading costs and, ultimately, worse asset allocation and higher cost of capital for companies. This would result in reduced financial security for American families, and perhaps also reduce economic growth and liquidity in US markets.
There’s a reason the world is jealous of US markets, but we can’t take it for granted.
Shiyun Song, Research Principal, contributed to this article.
