# How Has the Rise of Systematic Internalisers Impacted Liquidity on Lit Markets? ▴ Question

**Published:** 2025-08-02
**Categories:** Question

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## Concept

The rise of [Systematic Internalisers](https://prime.greeks.live/area/systematic-internalisers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (SIs) is not an isolated phenomenon; it is a direct and logical consequence of a fundamental tension within modern market architecture. This tension exists between the search for [execution quality](https://prime.greeks.live/area/execution-quality/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and the public good of transparent price discovery. To understand the impact of SIs on lit markets, one must first view the market not as a monolithic entity, but as a complex, interconnected system of competing liquidity venues, each with its own set of rules and incentives.

The core of the issue lies in how SIs operate ▴ they are private liquidity pools that execute client orders on their own books, but they derive their pricing information from the very public markets they compete with. This creates a parasitic relationship that fundamentally alters the dynamics of liquidity across the entire system.

An SI functions as an investment firm that deals on its own account when executing client orders outside a regulated market or a multilateral trading facility (MTF). Under the Markets in Financial Instruments Directive (MiFID II) framework in Europe, this activity is formalized. An SI has the right, but not the obligation, to execute its customers’ orders. They profit from the [bid-ask spread](https://prime.greeks.live/area/bid-ask-spread/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and by internalizing [uninformed order flow](https://prime.greeks.live/area/uninformed-order-flow/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), which is statistically less likely to move the price against them.

The critical point is that the prices they offer are benchmarked against the lit markets. They can offer a marginal [price improvement](https://prime.greeks.live/area/price-improvement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) ▴ a fraction of a tick better than the public quote ▴ which makes them attractive to best execution algorithms while not contributing to the formation of that public quote. This process effectively removes a segment of order flow from the public domain, a process known as [market fragmentation](https://prime.greeks.live/area/market-fragmentation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

> Systematic Internalisers function as private liquidity venues that execute client orders internally, referencing prices from public exchanges without contributing to the price discovery process.

This fragmentation has profound consequences. Lit markets, or transparent exchanges, depend on a diverse mix of order flow to function efficiently. This includes both informed flow (from traders who have superior information) and [uninformed flow](https://prime.greeks.live/area/uninformed-flow/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (often from retail investors or passive funds). [Market makers](https://prime.greeks.live/area/market-makers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) on lit exchanges provide liquidity by posting bids and offers, and their profitability depends on interacting with a high volume of uninformed flow to compensate for the losses they inevitably incur when trading with informed participants.

When SIs systematically siphon off the most desirable, uninformed orders, they leave the [lit market](https://prime.greeks.live/area/lit-market/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) makers to face a higher concentration of informed, or ‘toxic,’ flow. This increases the risk for lit market makers, forcing them to widen their bid-ask spreads and reduce the depth of their quotes to protect themselves. The result is a degradation of liquidity on the very markets that everyone, including the SIs, relies upon for accurate [price discovery](https://prime.greeks.live/area/price-discovery/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

The contribution of SIs to overall price discovery is therefore minimal. They are price takers, not price makers. While they offer liquidity, it is a form of dependent liquidity. This is a critical distinction.

[Lit markets](https://prime.greeks.live/area/lit-markets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) are primary centers of price discovery because they aggregate a wide range of buying and selling interest in a transparent manner, creating a reliable public price signal. SIs, along with other off-exchange venues like dark pools, are secondary sources of liquidity that leverage this price signal without meaningfully contributing to it. The systemic impact is a potential hollowing out of the central lit markets, leading to a less resilient and potentially more volatile [market structure](https://prime.greeks.live/area/market-structure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The very transparency that makes lit markets valuable also makes them vulnerable to being undermined by private execution venues that can operate with greater discretion and lower direct costs.

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## Strategy

The proliferation of Systematic Internalisers represents a strategic adaptation to the regulatory and technological landscape of modern finance. For market participants, interacting with SIs is not a random occurrence but a deliberate choice driven by a complex interplay of cost, risk, and regulatory obligations. Understanding the strategic calculus of each major player ▴ the buy-side, the sell-side, and the lit market makers ▴ is essential to grasping the systemic impact of this market structure.

![Abstract layered forms visualize market microstructure, featuring overlapping circles as liquidity pools and order book dynamics. A prominent diagonal band signifies RFQ protocol pathways, enabling high-fidelity execution and price discovery for institutional digital asset derivatives, hinting at dark liquidity and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-institutional-digital-asset-derivatives-rfq-protocol.jpg)

## The Buy-Side Strategic Imperative Best Execution

For an institutional investor, such as a pension fund or asset manager, the primary directive is to achieve ‘[best execution](https://prime.greeks.live/area/best-execution/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’ for its clients. The [MiFID II](https://prime.greeks.live/area/mifid-ii/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) framework expanded this concept beyond simply achieving the best price. It now encompasses a broader set of factors, including cost, speed, likelihood of execution, and settlement. This multi-faceted definition provides the strategic opening for SIs.

A buy-side firm’s Smart Order Router (SOR) is programmed to find the optimal execution venue based on these criteria. When a large order needs to be executed, routing it directly to a lit market can cause significant [market impact](https://prime.greeks.live/area/market-impact/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The order’s visibility can alert other market participants, who may trade ahead of it, driving the price up (for a buy order) or down (for a sell order). This price movement, known as slippage, can be a major cost to the investor.

SIs offer a solution to this problem. By executing the trade internally, an SI can offer a guaranteed price, often with a slight improvement over the lit market quote, and with zero market impact. This is particularly valuable for large, non-urgent trades where certainty of execution price is paramount.

> Buy-side firms strategically use Systematic Internalisers to minimize market impact and satisfy multi-faceted best execution requirements that extend beyond price alone.

The strategic decision for a buy-side trader, therefore, involves a trade-off. While they may recognize that routing flow to SIs could contribute to a long-term decline in [lit market liquidity](https://prime.greeks.live/area/lit-market-liquidity/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), their immediate fiduciary duty is to secure the best outcome for the specific trade at hand. The SI provides a quantifiable benefit in the form of price improvement and reduced slippage, making it a compelling choice, especially when compared to the uncertainty and potential costs of working a large order on a public exchange.

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## The Sell-Side Calculus Capturing Order Flow

For the sell-side firms that operate as SIs, the strategy is one of vertical integration and revenue optimization. By creating an internal marketplace, a large bank or dealer can capture its own clients’ [order flow](https://prime.greeks.live/area/order-flow/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) instead of sending it to an external venue. This has several advantages:

- 
**Revenue Generation** ▴ The firm earns the bid-ask spread on every trade it internalizes. This is a direct revenue stream that would otherwise be paid to an exchange or another [market maker](https://prime.greeks.live/area/market-maker/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

- 
**Risk Management** ▴ By seeing a large volume of client orders, the firm gains valuable information about market sentiment and positioning. This allows it to manage its own inventory and risk more effectively.

- 
**Client Retention** ▴ Offering high-quality execution via an SI is a powerful tool for retaining valuable clients. The ability to provide price improvement and minimize market impact is a significant competitive differentiator.

The “free-rider” problem is central to the SI strategy. The SI does not need to invest in the expensive infrastructure of a public exchange or take on the risks of a dedicated market maker who must quote continuously. Instead, it can opportunistically use the public quotes as a reference, step in front of them with a marginal price improvement, and execute the least risky orders (i.e. uninformed flow). This is a highly efficient and profitable business model that leverages the public good of price discovery without contributing to its upkeep.

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## The Plight of the Lit Market Maker

For market makers operating on lit exchanges, the rise of SIs represents a direct threat to their business model. Their role is to provide continuous liquidity by posting bids and offers, and they profit from the spread by trading with a balanced mix of informed and uninformed participants. SIs disrupt this balance by systematically filtering out the uninformed flow.

When a retail broker, for example, sends its entire order book to an SI, the lit market maker is deprived of this valuable, low-risk flow. The orders that do reach the lit market are more likely to be from informed traders or from large institutions that could not find liquidity elsewhere. This phenomenon is known as [adverse selection](https://prime.greeks.live/area/adverse-selection/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The market maker is left facing a higher proportion of “toxic” flow, meaning trades that are more likely to result in losses.

To compensate for this increased risk, the market maker has no choice but to widen its spreads and reduce the size of its quotes. This directly translates to lower liquidity and higher trading costs for everyone who uses the lit market.

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## How Does This Impact Market Structure?

The strategic interactions of these players create a feedback loop that can alter the entire market structure. As more flow is diverted to SIs, liquidity on lit markets may decline. This makes lit markets less attractive, potentially driving even more flow to SIs and other off-exchange venues. This fragmentation can lead to a two-tiered market ▴ a private tier for standard, uninformed flow, and a public, more volatile tier for everything else.

Regulators are acutely aware of this dynamic. Measures such as the tick-size regime, which aims to prevent SIs from offering price improvements that are too small, are attempts to level the playing field. However, the fundamental strategic incentives for using and operating SIs remain powerful, making this an ongoing area of tension and evolution in market design.

The following table illustrates the conflicting strategic objectives of the key market participants:

| Market Participant | Primary Strategic Objective | Role of Systematic Internalisers | Impact on Lit Market |
| --- | --- | --- | --- |
| Institutional Buy-Side | Achieve best execution (price, cost, speed, likelihood) and minimize market impact. | A venue for low-impact execution with potential price improvement. | Reduces their direct interaction with the lit market for certain types of orders. |
| Sell-Side (SI Operator) | Capture client order flow, generate revenue from the spread, and manage risk. | A core business unit for internalizing profitable trades. | Competes directly for order flow, leveraging the lit market’s price discovery. |
| Lit Market Maker | Profit from the bid-ask spread by providing continuous liquidity to a mix of flow. | A competitor that siphons off uninformed order flow, increasing adverse selection. | Faces higher risk, leading to wider spreads and reduced depth. |
| Regulators | Ensure fair, orderly, and transparent markets while promoting competition. | A regulated entity that requires oversight to prevent harm to price formation. | Monitors for signs of liquidity degradation and systemic risk. |

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## Execution

The theoretical and strategic implications of Systematic Internalisers are realized through a precise, technology-driven execution process. For institutional traders and portfolio managers, understanding the mechanics of how an order is routed, priced, and executed is not merely an academic exercise; it is fundamental to achieving control over trading outcomes. The decision to interact with an SI is embedded in a complex architecture of order management systems, smart order routers, and quantitative models designed to navigate a fragmented liquidity landscape.

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## The Operational Playbook the Life of a Trade

When a portfolio manager decides to execute a trade, the order does not simply appear on an exchange. It embarks on a journey through a sophisticated technological pipeline, where critical decisions are made in microseconds. The following steps outline a typical execution workflow involving the potential for SI interaction:

- 
**Order Generation** ▴ The process begins in the Portfolio Manager’s Order Management System (OMS), where the investment decision is translated into a specific order (e.g. “Buy 100,000 shares of XYZ Corp”).

- 
**Execution Strategy Selection** ▴ The order is passed to the trader’s Execution Management System (EMS). Here, the trader applies a high-level strategy. For a large order, this might involve an algorithmic strategy like a Volume-Weighted Average Price (VWAP) or a simple “point-and-shoot” approach for smaller, less sensitive orders.

- 
**[Smart Order Routing](https://prime.greeks.live/area/smart-order-routing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (SOR)** ▴ This is the critical juncture. The EMS hands the order (or a small part of it, in the case of an algorithmic strategy) to the Smart Order Router. The SOR’s sole function is to find the best possible execution venue at that precise moment. Its logic is programmed to consider all available sources of liquidity, including:

<li>Lit exchanges (e.g. NYSE, LSE)

- Multilateral Trading Facilities (MTFs)

- Dark Pools

- Systematic Internalisers

</li>
- 
**The SI Ping** ▴ Before routing to a public market, the SOR will often “ping” the SIs with which the firm has a relationship. It sends a request for a quote. The SI’s system instantly assesses the order and decides whether to offer a quote. If it does, the quote will typically be at or slightly better than the current National Best Bid and Offer (NBBO) on the lit markets.

- 
**The Execution Decision** ▴ The SOR compares the SI’s quote with the prices available on all other venues. Factoring in exchange fees, speed, and the likelihood of a fill, it makes its routing decision. If the SI offers the best all-in price, the trade is executed internally on the SI’s book. The confirmation is sent back to the EMS, and the trade is complete, having never touched a public exchange. If the SI declines to quote or its price is not competitive, the SOR will route the order to the next best venue, which is often a lit market.

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## Quantitative Modeling and Data Analysis

The decision-making process within the SOR is driven by quantitative data. Traders and brokers constantly analyze execution quality to refine their routing logic. The following table provides a hypothetical comparison of execution outcomes for a 50,000-share buy order in a moderately liquid stock, comparing a direct execution on a lit market versus an execution via an SI.

| Execution Metric | Execution on Lit Market | Execution via Systematic Internaliser | Analysis |
| --- | --- | --- | --- |
| Arrival Price | $100.00 | $100.00 | The market price at the moment the order is generated. |
| Average Execution Price | $100.03 | $100.005 | The lit market execution shows slippage as the large order consumes liquidity. The SI executes at a fixed price. |
| Price Improvement vs. NBBO | N/A | $0.005 per share | The SI provides a half-cent of price improvement compared to the lit market’s best offer of $100.01. |
| Total Slippage Cost | $1,500 | $250 | The cost of the price moving against the order during execution is significantly higher on the lit market. |
| Explicit Costs (Fees) | $50 | $0 | SIs often do not charge explicit fees, while exchanges do. |
| Information Leakage Risk | High | Low | The lit market order is visible, signaling buying intent. The SI trade is private until reported post-trade. |

This data illustrates the powerful incentive for the buy-side. The SI offers a demonstrably better outcome for this specific trade. However, the systemic effect is hidden.

What happens when a significant portion of the market’s order flow follows this path? The next table models the potential impact on the lit market itself as SI market share increases.

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## What Is the Systemic Impact on Lit Market Quality?

This model demonstrates the corrosive effect of rising SI volume on the primary public markets. As the most benign, uninformed flow is internalized, the risk for lit market makers increases, forcing them to protect themselves by widening spreads and reducing the liquidity they are willing to show. This degradation in lit [market quality](https://prime.greeks.live/area/market-quality/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) can, in turn, make SIs appear even more attractive, creating a self-reinforcing cycle.

| SI Market Share | Uninformed Flow to Lit Market | Lit Market Maker Quoted Spread | Lit Market Quoted Depth | Systemic Consequence |
| --- | --- | --- | --- | --- |
| 5% | 95% | $0.01 | 50,000 shares | A healthy, competitive market with tight spreads and deep liquidity. |
| 15% | 85% | $0.015 | 35,000 shares | Market makers begin to widen spreads to compensate for increased adverse selection. |
| 30% | 70% | $0.02 | 20,000 shares | A noticeable decline in lit liquidity. Trading costs on the public market increase. |
| 50% | 50% | $0.04 | 10,000 shares | Severe liquidity fragmentation. The lit market becomes a venue of last resort, with wide spreads and thin depth. |

![A precision instrument probes a speckled surface, visualizing market microstructure and liquidity pool dynamics within a dark pool. This depicts RFQ protocol execution, emphasizing price discovery for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-flow.jpg)

## System Integration and Technological Architecture

The seamless interaction between a trading desk and an SI is a feat of significant technological integration. The entire process is mediated by a standardized messaging protocol, the Financial Information eXchange (FIX) protocol. When an SOR “pings” an SI, it is sending a FIX message ▴ typically a ‘New Order – Single’ (35=D) message with a ‘Time in Force’ (59) set to ‘Immediate or Cancel’ (IOC).

The SI’s system receives this message, runs its internal pricing and risk checks, and if it chooses to trade, sends an ‘Execution Report’ (35=8) back to the SOR confirming the fill. If it declines, it may send a ‘Reject’ message.

This high-speed communication is built on a foundation of sophisticated technology:

- 
**Low-Latency Networks** ▴ Co-location of servers in data centers and dedicated fiber optic lines are used to minimize the physical time it takes for messages to travel between the broker and the SI.

- 
**High-Throughput Engines** ▴ Both the SOR and the SI’s matching engine must be capable of processing thousands of messages per second to handle the volume of modern electronic trading.

- 
**Risk Management Systems** ▴ The SI’s ability to internalize flow is contingent on a real-time risk management system that constantly monitors the firm’s overall exposure and profitability.

The rise of SIs has forced a co-evolution in the technology of both the buy-side and the sell-side. Buy-side firms must invest in sophisticated SORs to navigate the fragmented landscape, while sell-side firms must build robust, high-performance systems to compete for and monetize order flow. The result is a technological arms race where the ultimate goal is to achieve a fractional advantage in price, speed, or certainty of execution.

![Two smooth, teal spheres, representing institutional liquidity pools, precisely balance a metallic object, symbolizing a block trade executed via RFQ protocol. This depicts high-fidelity execution, optimizing price discovery and capital efficiency within a Principal's operational framework for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/precision-execution-bridging-institutional-liquidity-pools-via-rfq-protocol-for-optimized-digital-asset-derivatives-price-discovery.jpg)

## References

- Gomber, P. et al. “Competition between trading venues ▴ The impact of systematic internalizers.” Journal of Banking & Finance, vol. 85, 2017, pp. 69-84.

- Foucault, T. and A. Lescourret. “The rise of systematic internalizers and its impact on financial market quality.” CEPR Discussion Paper, no. DP13647, 2019.

- “MiFID II/MiFIR ▴ Systematic Internalisers.” ESMA Briefing, ESMA/2017/SMSG/010, 2017.

- UK Government, Financial Services Authority. “The impact of internalisation on the quality of displayed liquidity.” FSA Occasional Paper, no. 42, 2012.

- Comerton-Forde, C. et al. “Dark trading and the evolution of market quality.” Journal of Financial Economics, vol. 134, no. 2, 2019, pp. 304-325.

![Central blue-grey modular components precisely interconnect, flanked by two off-white units. This visualizes an institutional grade RFQ protocol hub, enabling high-fidelity execution and atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-core-interconnect-for-high-fidelity-execution.jpg)

## Reflection

The architecture of our markets is not a static blueprint; it is a living system in a constant state of flux, shaped by the currents of regulation, technology, and strategic self-interest. The ascent of the [Systematic Internaliser](https://prime.greeks.live/area/systematic-internaliser/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a testament to this dynamism. It presents a fundamental question not just about market structure, but about the very nature of liquidity itself.

Is liquidity a public utility, a shared resource to be nurtured for the collective good of price discovery? Or is it a private commodity, to be captured, internalized, and optimized for individual gain?

Viewing this through a systems lens, we see a structure under stress. The lit markets, the traditional heart of the system, are being bypassed. The very participants who rely on the health of this heart for the lifeblood of pricing information are the ones performing the bypass.

This is not a judgment, but an observation of the system’s internal logic. The incentives for short-term execution quality are powerful and, under current frameworks, often align with routing flow away from the central arteries of the market.

The knowledge gained here is a component in a larger operational framework. How does your own firm’s execution protocol account for this fragmented reality? Is your definition of best execution static, or does it adapt to changing market conditions?

The challenge is not to simply choose between lit and dark, but to build an intelligent, responsive system that can navigate the complexities of both. The ultimate strategic edge lies not in finding a single ‘best’ venue, but in mastering the entire, interconnected system of liquidity.

![A glowing blue module with a metallic core and extending probe is set into a pristine white surface. This symbolizes an active institutional RFQ protocol, enabling precise price discovery and high-fidelity execution for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocol-driving-institutional-digital-asset-derivatives-high-fidelity-execution-precise-price-discovery-for-block-trades-and-capital-efficiency.jpg)

## Glossary

<a href="https://prime.greeks.live/area/systematic-internalisers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek blue and white mechanism with a focused lens symbolizes Pre-Trade Analytics for Digital Asset Derivatives. A glowing turquoise sphere represents a Block Trade within a Liquidity Pool, demonstrating High-Fidelity Execution via RFQ protocol for Price Discovery in Dark Pool Market Microstructure](https://options.greeks.live/wp-content/uploads/2025/07/advanced-institutional-digital-asset-derivatives-rfq-execution-system-for-optimal-price-discovery-and-high-fidelity-execution.jpg)

## Systematic Internalisers

Meaning ▴ Systematic Internalisers, in the context of institutional crypto trading, are regulated entities that, as a principal, frequently and systematically execute client orders against their own proprietary capital, operating outside the purview of a multilateral trading facility or regulated exchange. </a><a href="https://prime.greeks.live/area/execution-quality/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract visualization of institutional digital asset RFQ protocols. Intersecting elements symbolize high-fidelity execution slicing dark liquidity pools, facilitating precise price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-protocol-execution-intelligence-layer.jpg)

## Execution Quality

Meaning ▴ Execution quality, within the framework of crypto investing and institutional options trading, refers to the overall effectiveness and favorability of how a trade order is filled. </a><a href="https://prime.greeks.live/area/uninformed-order-flow/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Curved, segmented surfaces in blue, beige, and teal, with a transparent cylindrical element against a dark background. This abstractly depicts volatility surfaces and market microstructure, facilitating high-fidelity execution via RFQ protocols for digital asset derivatives, enabling price discovery and revealing latent liquidity for institutional trading](https://options.greeks.live/wp-content/uploads/2025/07/optimized-rfq-protocol-dynamics-for-institutional-crypto-derivatives.jpg)

## Uninformed Order Flow

Meaning ▴ Uninformed Order Flow represents trading activity originating from market participants who do not possess superior or private information that could predict future price movements. </a><a href="https://prime.greeks.live/area/bid-ask-spread/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A slender metallic probe extends between two curved surfaces. This abstractly illustrates high-fidelity execution for institutional digital asset derivatives, driving price discovery within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/precision-instrument-navigating-institutional-digital-asset-derivatives-rfq-protocols-for-optimal-price-discovery-and-high-fidelity-execution.jpg)

## Bid-Ask Spread

Meaning ▴ The Bid-Ask Spread, within the cryptocurrency trading ecosystem, represents the differential between the highest price a buyer is willing to pay for an asset (the bid) and the lowest price a seller is willing to accept (the ask). </a><a href="https://prime.greeks.live/area/market-fragmentation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two semi-transparent, curved elements, one blueish, one greenish, are centrally connected, symbolizing dynamic institutional RFQ protocols. This configuration suggests aggregated liquidity pools and multi-leg spread constructions](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-price-discovery-engine.jpg)

## Market Fragmentation

Meaning ▴ Market Fragmentation, within the cryptocurrency ecosystem, describes the phenomenon where liquidity for a given digital asset is dispersed across numerous independent trading venues, including centralized exchanges, decentralized exchanges (DEXs), and over-the-counter (OTC) desks. </a><a href="https://prime.greeks.live/area/price-improvement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central, blue-illuminated, crystalline structure symbolizes an institutional grade Crypto Derivatives OS facilitating RFQ protocol execution. Diagonal gradients represent aggregated liquidity and market microstructure converging for high-fidelity price discovery, optimizing multi-leg spread trading for digital asset options](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-11.jpg)

## Price Improvement

Meaning ▴ Price Improvement, within the context of institutional crypto trading and Request for Quote (RFQ) systems, refers to the execution of an order at a price more favorable than the prevailing National Best Bid and Offer (NBBO) or the initially quoted price. </a><a href="https://prime.greeks.live/area/uninformed-flow/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A luminous teal bar traverses a dark, textured metallic surface with scattered water droplets. This represents the precise, high-fidelity execution of an institutional block trade via a Prime RFQ, illustrating real-time price discovery](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-real-time-institutional-digital-asset-rfq-execution-stream-visualizing-prime-os-liquidity-flow.jpg)

## Uninformed Flow

Meaning ▴ Uninformed Flow refers to trading activity originating from market participants who do not possess any private or superior information regarding future price movements of an asset. </a><a href="https://prime.greeks.live/area/market-makers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek blue surface with droplets represents a high-fidelity Execution Management System for digital asset derivatives, processing market data. A lighter surface denotes the Principal's Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-for-optimal-price-discovery.jpg)

## Market Makers

Meaning ▴ Market Makers are essential financial intermediaries in the crypto ecosystem, particularly crucial for institutional options trading and RFQ crypto, who stand ready to continuously quote both buy and sell prices for digital assets and derivatives. </a><a href="https://prime.greeks.live/area/price-discovery/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract architectural representation of a Prime RFQ for institutional digital asset derivatives, illustrating RFQ aggregation and high-fidelity execution. Intersecting beams signify multi-leg spread pathways and liquidity pools, while spheres represent atomic settlement points and implied volatility](https://options.greeks.live/wp-content/uploads/2025/07/architecting-institutional-digital-asset-derivatives-trading-systems-for-optimized-rfq-execution-and-advanced-price-discovery.jpg)

## Price Discovery

Meaning ▴ Price Discovery, within the context of crypto investing and market microstructure, describes the continuous process by which the equilibrium price of a digital asset is determined through the collective interaction of buyers and sellers across various trading venues. </a><a href="https://prime.greeks.live/area/lit-market/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision sphere, an Execution Management System EMS, probes a Digital Asset Liquidity Pool. This signifies High-Fidelity Execution via Smart Order Routing for institutional-grade digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/principal-rfq-engine-orchestrating-global-digital-asset-derivatives-liquidity-pool-price-discovery-and-high-fidelity-execution.jpg)

## Lit Market

Meaning ▴ A Lit Market, within the crypto ecosystem, represents a trading venue where pre-trade transparency is unequivocally provided, meaning bid and offer prices, along with their associated sizes, are publicly displayed to all participants before execution. </a><a href="https://prime.greeks.live/area/market-structure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A disaggregated institutional-grade digital asset derivatives module, off-white and grey, features a precise brass-ringed aperture. It visualizes an RFQ protocol interface, enabling high-fidelity execution, managing counterparty risk, and optimizing price discovery within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-protocol-modular-execution-intelligence-system.jpg)

## Market Structure

Meaning ▴ Market structure refers to the foundational organizational and operational framework that dictates how financial instruments are traded, encompassing the various types of venues, participants, governing rules, and underlying technological protocols. </a><a href="https://prime.greeks.live/area/lit-markets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Precision-engineered modular components display a central control, data input panel, and numerical values on cylindrical elements. This signifies an institutional Prime RFQ for digital asset derivatives, enabling RFQ protocol aggregation, high-fidelity execution, algorithmic price discovery, and volatility surface calibration for portfolio margin](https://options.greeks.live/wp-content/uploads/2025/07/firm-fx-options-rfq-trade-system-key-microstructure-data-flow-core-engine.jpg)

## Lit Markets

Meaning ▴ Lit Markets, in the plural, denote a collective of trading venues in the crypto landscape where full pre-trade transparency is mandated, ensuring that all executable bids and offers, along with their respective volumes, are openly displayed to all market participants. </a><a href="https://prime.greeks.live/area/best-execution/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, illuminated object, symbolizing an advanced RFQ protocol or Execution Management System, precisely intersects two broad surfaces representing liquidity pools within market microstructure. Its glowing line indicates high-fidelity execution and atomic settlement of digital asset derivatives, ensuring best execution and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/principals-rfq-protocol-high-fidelity-execution-digital-asset-derivatives-market-microstructure-price-discovery-alpha-generation.jpg)

## Best Execution

Meaning ▴ Best Execution, in the context of cryptocurrency trading, signifies the obligation for a trading firm or platform to take all reasonable steps to obtain the most favorable terms for its clients' orders, considering a holistic range of factors beyond merely the quoted price. </a><a href="https://prime.greeks.live/area/mifid-ii/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated institutional digital asset derivatives platform unveils its core market microstructure. Intricate circuitry powers a central blue spherical RFQ protocol engine on a polished circular surface](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-prime-os-unveiling-rfq-protocol-engine-market-microstructure-for-optimal-price-discovery-and-high-fidelity-execution.jpg)

## Mifid Ii

Meaning ▴ MiFID II (Markets in Financial Instruments Directive II) is a comprehensive regulatory framework implemented by the European Union to enhance the efficiency, transparency, and integrity of financial markets. </a><a href="https://prime.greeks.live/area/market-impact/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A segmented rod traverses a multi-layered spherical structure, depicting a streamlined Institutional RFQ Protocol. This visual metaphor illustrates optimal Digital Asset Derivatives price discovery, high-fidelity execution, and robust liquidity pool integration, minimizing slippage and ensuring atomic settlement for multi-leg spreads within a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-flow-1.jpg)

## Market Impact

Meaning ▴ Market impact, in the context of crypto investing and institutional options trading, quantifies the adverse price movement caused by an investor's own trade execution. </a><a href="https://prime.greeks.live/area/lit-market-liquidity/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Polished, curved surfaces in teal, black, and beige delineate the intricate market microstructure of institutional digital asset derivatives. These distinct layers symbolize segregated liquidity pools, facilitating optimal RFQ protocol execution and high-fidelity execution, minimizing slippage for large block trades and enhancing capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/precision-rfq-protocol-execution-institutional-digital-asset-derivatives-flow.jpg)

## Lit Market Liquidity

Meaning ▴ Lit Market Liquidity refers to the depth and accessibility of executable orders displayed transparently on a public order book, where all participants can view current bid and ask prices and associated volumes. </a><a href="https://prime.greeks.live/area/order-flow/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sleek, engineered components depict an institutional-grade Execution Management System. The prominent dark structure represents high-fidelity execution of digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-for-optimized-price-discovery-high-fidelity-execution-and-market-microstructure.jpg)

## Order Flow

Meaning ▴ Order Flow represents the aggregate stream of buy and sell orders entering a financial market, providing a real-time indication of the supply and demand dynamics for a particular asset, including cryptocurrencies and their derivatives. </a><a href="https://prime.greeks.live/area/market-maker/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Angularly connected segments portray distinct liquidity pools and RFQ protocols. A speckled grey section highlights granular market microstructure and aggregated inquiry complexities for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-efficiency.jpg)

## Market Maker

Meaning ▴ A Market Maker, in the context of crypto financial markets, is an entity that continuously provides liquidity by simultaneously offering to buy (bid) and sell (ask) a particular cryptocurrency or derivative. </a><a href="https://prime.greeks.live/area/adverse-selection/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A metallic, modular trading interface with black and grey circular elements, signifying distinct market microstructure components and liquidity pools. A precise, blue-cored probe diagonally integrates, representing an advanced RFQ engine for granular price discovery and atomic settlement of multi-leg spread strategies in institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-system-facilitating-high-fidelity-execution-price-discovery.jpg)

## Adverse Selection

Meaning ▴ Adverse selection in the context of crypto RFQ and institutional options trading describes a market inefficiency where one party to a transaction possesses superior, private information, leading to the uninformed party accepting a less favorable price or assuming disproportionate risk. </a><a href="https://prime.greeks.live/area/smart-order-routing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Precision metallic component, possibly a lens, integral to an institutional grade Prime RFQ. Its layered structure signifies market microstructure and order book dynamics](https://options.greeks.live/wp-content/uploads/2025/08/high-fidelity-institutional-digital-asset-rfq-execution-engine.jpg)

## Smart Order Routing

Meaning ▴ Smart Order Routing (SOR), within the sophisticated framework of crypto investing and institutional options trading, is an advanced algorithmic technology designed to autonomously direct trade orders to the optimal execution venue among a multitude of available exchanges, dark pools, or RFQ platforms. </a><a href="https://prime.greeks.live/area/market-quality/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sharp metallic element pierces a central teal ring, symbolizing high-fidelity execution via an RFQ protocol gateway for institutional digital asset derivatives. This depicts precise price discovery and smart order routing within market microstructure, optimizing dark liquidity for block trades and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-protocol-optimizing-liquidity-discovery-and-smart-order-routing.jpg)

## Market Quality

Meaning ▴ Market Quality, within the systems architecture of crypto, crypto investing, and institutional options trading, refers to the collective attributes that characterize the efficiency and integrity of a trading venue, influencing the ease and cost with which participants can execute transactions. </a><a href="https://prime.greeks.live/area/systematic-internaliser/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A circular mechanism with a glowing conduit and intricate internal components represents a Prime RFQ for institutional digital asset derivatives. This system facilitates high-fidelity execution via RFQ protocols, enabling price discovery and algorithmic trading within market microstructure, optimizing capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-institutional-digital-asset-derivatives-rfq-protocol-core.jpg)

## Systematic Internaliser

Meaning ▴ A Systematic Internaliser (SI), in the context of institutional crypto trading and particularly relevant under evolving regulatory frameworks contemplating MiFID II-like structures for digital assets, designates an investment firm that executes client orders against its own proprietary capital on an organized, frequent, and systematic basis outside of a regulated market or multilateral trading facility. </a>

**Tags:** [Systematic Internaliser](https://options.greeks.live/area/systematic-internaliser/), [Market Makers](https://options.greeks.live/area/market-makers/), [Adverse Selection](https://options.greeks.live/area/adverse-selection/), [Lit Market Liquidity](https://options.greeks.live/area/lit-market-liquidity/), [Market Quality](https://options.greeks.live/area/market-quality/), [Best Execution](https://options.greeks.live/area/best-execution/)	

## Discover More

- 
### [What Are the Regulatory Implications of High Dealer Internalization Rates for Market Transparency?](https://options.greeks.live/question/what-are-the-regulatory-implications-of-high-dealer-internalization-rates-for-market-transparency/)
![Abstract geometric planes in teal, navy, and grey intersect. A central beige object, symbolizing a precise RFQ inquiry, passes through a teal anchor, representing High-Fidelity Execution within Institutional Digital Asset Derivatives. This depicts optimal Price Discovery and Liquidity Aggregation.](https://options.greeks.live/wp-content/uploads/2025/07/rfq-protocols-for-digital-asset-derivatives-high-fidelity-execution-liquidity-aggregation-price-discovery-market-microstructure.jpg)

High dealer internalization rates challenge market transparency by fragmenting liquidity and degrading public price discovery.

- 
### [How Do Volume Caps on Dark Pools Affect Algorithmic Trading Strategies?](https://options.greeks.live/question/how-do-volume-caps-on-dark-pools-affect-algorithmic-trading-strategies/)
![Two intertwined, reflective, metallic structures with translucent teal elements at their core, converging on a central nexus against a dark background. This represents a sophisticated RFQ protocol facilitating price discovery within digital asset derivatives markets, denoting high-fidelity execution and institutional-grade systems optimizing capital efficiency via latent liquidity and smart order routing across dark pools.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-system-architecture.jpg)

Volume caps convert dark pools into dynamic constraints, compelling algorithms to evolve from static routers into intelligent liquidity-sourcing systems.

- 
### [What Are the Regulatory Implications of Increasingly Complex Dark Pool Segmentation Strategies?](https://options.greeks.live/question/what-are-the-regulatory-implications-of-increasingly-complex-dark-pool-segmentation-strategies/)
![A multi-faceted crystalline star, symbolizing the intricate Prime RFQ architecture, rests on a reflective dark surface. Its sharp angles represent precise algorithmic trading for institutional digital asset derivatives, enabling high-fidelity execution and price discovery. This encapsulates RFQ protocols, multi-leg spread optimization, capital efficiency, and market microstructure dynamics.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-high-fidelity-execution-market-microstructure-optimization-for-prime-os-alpha-generation.jpg)

Complex dark pool segmentation prompts regulations focused on fairness, price discovery, and mitigating systemic risk.

- 
### [Could Excessive Dark Pool Trading Volume Destabilize the Primary Public Exchanges?](https://options.greeks.live/question/could-excessive-dark-pool-trading-volume-destabilize-the-primary-public-exchanges/)
![A futuristic, institutional-grade sphere, diagonally split, reveals a glowing teal core of intricate circuitry. This represents a high-fidelity execution engine for digital asset derivatives, facilitating private quotation via RFQ protocols, embodying market microstructure for latent liquidity and precise price discovery.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-engine-prime-os.jpg)

Excessive dark pool volume can degrade public price discovery, creating a systemic feedback loop that undermines the stability of all markets.

- 
### [What Are the Primary Risks Associated with Over-Reliance on Dark Pool Liquidity?](https://options.greeks.live/question/what-are-the-primary-risks-associated-with-over-reliance-on-dark-pool-liquidity/)
![Sleek, dark components with a bright turquoise data stream symbolize a Principal OS enabling high-fidelity execution for institutional digital asset derivatives. This infrastructure leverages secure RFQ protocols, ensuring precise price discovery and minimal slippage across aggregated liquidity pools, vital for multi-leg spreads.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-protocol-systemic-execution-interface.jpg)

Over-reliance on dark pools creates systemic risk by degrading price discovery and exposing orders to information leakage.

- 
### [How Is the Growth of Retail Trading Affecting the Dynamics between Lit and Dark Venues?](https://options.greeks.live/question/how-is-the-growth-of-retail-trading-affecting-the-dynamics-between-lit-and-dark-venues/)
![Two semi-transparent, curved elements, one blueish, one greenish, are centrally connected, symbolizing dynamic institutional RFQ protocols. This configuration suggests aggregated liquidity pools and multi-leg spread constructions. The precision illustrates high-fidelity execution within a Principal's operational framework, optimizing price discovery for digital asset derivatives, navigating complex market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-price-discovery-engine.jpg)

The growth of retail trading funnels uninformed flow to dark venues, altering liquidity and price discovery on lit exchanges.

- 
### [How Do Systematic Internalisers Affect Price Discovery on Public European Exchanges?](https://options.greeks.live/question/how-do-systematic-internalisers-affect-price-discovery-on-public-european-exchanges/)
![A central, blue-illuminated, crystalline structure symbolizes an institutional grade Crypto Derivatives OS facilitating RFQ protocol execution. Diagonal gradients represent aggregated liquidity and market microstructure converging for high-fidelity price discovery, optimizing multi-leg spread trading for digital asset options.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-11.jpg)

Systematic Internalisers affect price discovery by internalizing order flow, which reduces public market volume and alters the information content of lit exchange prices.

- 
### [How Did Systematic Internalisers Change the European Equity Market Structure?](https://options.greeks.live/question/how-did-systematic-internalisers-change-the-european-equity-market-structure/)
![A diagonal metallic framework supports two dark circular elements with blue rims, connected by a central oval interface. This represents an institutional-grade RFQ protocol for digital asset derivatives, facilitating block trade execution, high-fidelity execution, dark liquidity, and atomic settlement on a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/optimized-institutional-digital-asset-derivatives-trading-system-rfq-protocols-and-atomic-settlement.jpg)

Systematic Internalisers architected a dual-liquidity system in Europe, integrating private dealer capital into the public market framework.

- 
### [Can the Proliferation of Dark Pools Lead to a Decline in Overall Market Liquidity?](https://options.greeks.live/question/can-the-proliferation-of-dark-pools-lead-to-a-decline-in-overall-market-liquidity/)
![Sleek, abstract system interface with glowing green lines symbolizing RFQ pathways and high-fidelity execution. This visualizes market microstructure for institutional digital asset derivatives, emphasizing private quotation and dark liquidity within a Prime RFQ framework, enabling best execution and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocol-for-institutional-digital-asset-derivatives.jpg)

The proliferation of dark pools reconfigures market liquidity by segmenting order flow, a dynamic that can either degrade or enhance market quality depending on the regulatory framework and participant strategies.

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                "text": "The strategic interactions of these players create a feedback loop that can alter the entire market structure. As more flow is diverted to SIs, liquidity on lit markets may decline. This makes lit markets less attractive, potentially driving even more flow to SIs and other off-exchange venues. This fragmentation can lead to a two-tiered market: a private tier for standard, uninformed flow, and a public, more volatile tier for everything else."
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                "text": "This model demonstrates the corrosive effect of rising SI volume on the primary public markets. As the most benign, uninformed flow is internalized, the risk for lit market makers increases, forcing them to protect themselves by widening spreads and reducing the liquidity they are willing to show. This degradation in lit market quality can, in turn, make SIs appear even more attractive, creating a self-reinforcing cycle."
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---

**Original URL:** https://options.greeks.live/question/how-has-the-rise-of-systematic-internalisers-impacted-liquidity-on-lit-markets/
