An amazing milestone was passed in 2025: It was the year when off-exchange market share increased above 50%.
But looking at price discovery during the day, lit trading is even lower.
Interestingly, we find that the market is the darkest in the middle of the day.
Lit price discovery falls to 30% of continuous trading
A lot of price discovery happens during the day – while traders are working on large orders searching for liquidity – and economic news is fresh.
We have previously noted 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 lit venues at the National Best Bid and Offer (NBBO).
Chart 1: In continuous trading, when price discovery happens, dark is even higher
Interestingly, the light grey shade shows the proportion of trades on exchange but at prices that are not on the SIP. That includes a lot of midpoints, but also odd lots. It also shows that even investors who like exchanges for their ability to attract liquidity, still like to stay “hidden.”
It’s darkest in the middle of the day
We can also take a deeper dive to see if the level of hidden trading changes throughout the day.
The data shows that traders rely more on lit quotes at the start and end of each day. It is, therefore, the darkest in the middle of the day.
Chart 2: The middle of the day has the lowest proportion of on exchange trades
Interestingly, though, the proportion of “lit” trades (exchange trades at the NBBO) is less variable – starting at around 30% in the morning and not really increasing until closer to 3:30 p.m. Eastern time. That’s likely when the certainty of hitting a lit quote becomes a more important factor for traders as they near the end of the day.
What about that “tipping point?”
Academics have for years thought that the 50% off-exchange represents a “tipping point,” where the NBBO no longer rewards price setters and price discovery degrades. The reason the NBBO would degrade is explained by cream skimming research.
- The most profitable spread-crossing trades are siphoned to off-exchange venues (by offering price improvement, PFOF or tiering).
- Concentrating less profitable spread-crossing trades in fair access (lit) markets.
- Because price setters in lit markets need to actually capture spread, they will need the spreads to widen to account for the lower rate of spread capture on the NBBO.
If we listen to academics, the trend we’ve seen over the last 20 years is now unlikely to reverse.
By implication, too, the NBBO is now likely wider than it should be.
What this all means
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 unlevel the playing field. Off-exchange venues are able to segment and sometimes trade off-tick, making it easier to capture spread from less toxic flow, while exchanges must offer access to everyone. This, in turn, makes providing a quote on exchange less attractive, which leads to wider quotes and, as a result, creates a self-fulfilling cycle of increasing off-exchange trading.
We have even found that these economic differences allow less-toxic venues to charge more for trading.
In addition, SIP accounting can actually subsidize off-exchange venues.
It’s hard to expect lit trading to improve against headwinds like this.
The risk is this all leads to less competitive quotes, then higher trading costs and, ultimately, worse asset allocation and higher costs of capital for companies. That would result in less financial security for U.S. households, and perhaps even lower economic growth and liquidity in U.S. markets.
There is a reason U.S. markets are the envy of the world, but we can’t take any of it for granted.
Shiyun Song, Research Principal, contributed to this article.
