Modern markets can be highly liquid in aggregate while still forcing traders to search across multiple venues, dealers and internal pools to find that liquidity. Fragmentation is changing what “liquid” means in practice.
Liquidity can be abundant and still hard to see
One of the paradoxes of electronic markets is that more competition does not always create a single, deeper pool of liquidity. Instead, trading can spread across exchanges, dealer platforms, alternative venues, request-for-quote systems and internal matching engines. The total amount of liquidity may be large, but no single participant sees all of it.
The foreign-exchange market provides a useful case study. The BIS - FX trade execution landscape, 2025 Triennial Survey describes a decentralized and fragmented execution landscape in which participants can trade through multiple electronic venues, directly with dealers or via internal liquidity pools.
For traders, that changes the execution problem. The challenge is no longer only deciding whether to buy or sell. It is deciding where, when and through which protocol to execute in order to minimize spread, market impact and information leakage.
Internalisation makes more trading invisible
A growing share of activity can be matched inside dealer systems rather than displayed on a public venue. In FX, the BIS reported that dealers were able to internalize a large proportion of customer flow during periods of heightened volatility in 2025. That can reduce immediate market impact because offsetting client trades are matched internally.
The trade-off is transparency. When more activity takes place in private pools, public prices may represent a smaller fraction of total trading activity. Price discovery can remain effective, but participants must infer market conditions from a narrower visible slice of the market.
This is why liquidity and transparency should not be treated as identical concepts. A market can function smoothly with large amounts of non-visible liquidity, yet become harder to interpret for participants that do not have access to the same dealer relationships or aggregation technology.
Technology helps traders navigate the fragmentation
Fragmentation has created demand for smart order routing, liquidity aggregation and execution algorithms. These tools compare prices across venues, divide orders into smaller pieces and adapt execution to changing market conditions.
In the latest BIS survey, electronic methods accounted for a large share of FX activity while participants continued to use multiple channels, including voice for larger or more bespoke trades. The result is not a simple shift from human trading to electronic trading, but a hybrid structure in which different methods are chosen for different liquidity needs.
This favors sophisticated trading organizations with the infrastructure to connect to multiple providers and measure execution quality. Smaller participants can gain access through platforms and aggregators, but the technological fixed cost of best execution rises as the number of possible venues increases.
Better average liquidity can coexist with more fragile episodes
The long-run improvement in trading technology has generally reduced spreads, but averages can hide stress behavior. The BIS - Through stormy seas: liquidity across asset classes finds that algorithmic trading and market fragmentation are associated with lower average spreads but, in some markets, also with signs of reduced resilience and more pronounced episodes of illiquidity.
That distinction matters to risk management. A strategy calibrated to normal bid-ask spreads may behave very differently when displayed liquidity disappears or when several venues respond to the same shock at once. The cost of liquidation is determined by stressed depth, not by the average spread observed in ordinary conditions.
Traders increasingly need to model liquidity as a distribution rather than a constant. The relevant questions include how quickly depth replenishes, whether liquidity providers remain active under volatility and how correlated different venues are during stress.
Fragmentation can also improve resilience
Fragmentation is not inherently negative. Multiple venues and providers can give participants alternatives when one channel becomes expensive or impaired. The BIS observed that the fragmented FX landscape remained resilient during market turbulence in April 2025, with participants able to adapt execution strategies and access different pools of liquidity.
Competition between venues can also reduce trading costs and encourage innovation in execution protocols. A trader may prefer a disclosed request-for-quote system for one order and an anonymous central limit order book for another. The diversity of mechanisms can be a feature rather than a flaw.
The key issue is whether fragmentation creates genuine redundancy or merely disperses the same underlying liquidity. If multiple venues rely on the same small group of liquidity providers, apparent diversity may disappear when those providers simultaneously reduce risk.
Execution quality becomes a strategic capability
The BIS - OTC foreign exchange turnover in April 2025 shows the scale and international concentration of FX activity, reinforcing how much trading infrastructure depends on major global financial centres and cross-border flows. As markets become more electronic and fragmented, execution quality becomes an increasingly important source of performance.
For institutional traders, this means investment in transaction-cost analysis, venue selection, counterparty analytics and data normalization. For regulators and market operators, the challenge is to preserve competition while ensuring that price formation remains robust and that participants understand where risks are accumulating.
The next stage of market structure is therefore unlikely to be a return to one central pool. It is more likely to involve better technology for stitching together many pools. In that environment, finding liquidity can be almost as important as predicting price.