How Market Fragmentation Hurts The Retail Trader

Stock market fragmentation is a hot topic of debate on Wall Street, but Benzinga’s PreMarket Prep co-host Dennis Dick said Friday that he’s getting increasingly frustrated with trading in such a fragmented market.

Fragmentation refers to the fact that there are 13 exchanges and more than 30 active alternative trading systems out there today. While those in favor of fragmentation see it as boosting market liquidity, others say it creates opportunity for pricing shenanigans.

Fragmentation Fallout: In Friday morning’s pre-market session, Dick was frustrated because he was seeing trades in a particular stock executed on another exchange when he had a limit sell order set at a much lower price.

“They say fragmentation is good for the investor, and they don’t realize I’m selling the stock at $108.80 and it’s printing $109.70 [on NSDQ],” Dick said.

“I don’t know who controls the routing or if they’re intentionally routing around my order and this is an entire market structure issue. But believe me, this happens because you don’t have any book protection in the premarket at all.”

Dick said traders can set a limit price for an order, and that stock can trade through that price on a different exchange in the pre-market session without the trader’s limit order ever getting filled. Fragmentation muddies the waters and likely allows brokers to route around retail orders and fill their own orders first.

“Regulators, if you’re listening, fragmentation sucks...I’m out there offering a stock at $108 and it’s printing $110!” Dick said.

“I’m on NSDQ, and it prints on Arca. Then I move to Arca and it moves to NSDQ. And obviously a lot of retail traders that don’t control routing may not notice this type of stuff, but you see it happen where they’re trading through your price and you don’t get filled.”

Too Many Exchanges: Dick said the CME and the futures market are so efficient because all the trades happen on one exchange.

“You have every stock trading on 13 bloody exchanges, you’ve got all these other stocks trading on dark pools--you’ve got 50 different dark pools. You’ve got off-exchange market makers that are trading and controlling all the retail flow, capturing all that, doing 25% or 30%, taking it away from the public markets where they’re just printing and matching the best price,” Dick said.

Not only was he unable to get his price on the shares he was trying to sell, but the buyer who bought at the higher price was a victim as well.

Dick has previously met with regulators to discuss this type of fallout from market fragmentation, but he said nothing has changed from a regulatory perspective while the fragmentation gets worse.

“Why do you think you get free trades on all these platforms? So they can control your routing, route your orders around and screw the limit orders that are out there.”

Watch Dennis' full rant in the clip below, or listen to the podcast here

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET Benzinga's YouTube channel, and the podcast is on Spotify, iTunes, Google Play, Soundcloud, Stitcher and Tunein.

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