Equity markets look superficially simple — stocks trade on exchanges — but the modern reality is fragmented and complex. A single US-listed stock trades across NYSE, NASDAQ, multiple ECNs, dozens of dark pools, and internalisation engines at major brokers. Kenya is simpler (NSE only) but the principles transfer.
Exchange types
- Public exchanges (NYSE, NASDAQ, LSE, NSE Kenya): continuous limit order books with price-time priority. Anyone with a broker can route an order here. Full pre-trade transparency.
- ECNs (Electronic Communication Networks): operate similarly to exchanges but historically focused on institutional flow. ARCA, BATS (now part of CBOE), Direct Edge. Many were absorbed into major exchanges.
- Dark pools: order books not displayed publicly. Trades print to the tape after execution. Used by institutions to execute large blocks without signalling their intent. Examples: Liquidnet, Sigma X (Goldman), ITG POSIT.
- Internalisation: large brokers (Schwab, Robinhood) match retail orders against their own inventory or other retail flow before sending to exchanges. The customer gets execution; the broker captures the spread or pays it to a wholesaler (Citadel Securities, Virtu).
Market makers and designated market makers
A market maker posts both a bid and an ask continuously. They earn spreads on the round trips. In modern equity markets, traditional designated market makers (DMMs at NYSE; Specialists historically) have been replaced by competitive market making across multiple venues. Citadel Securities and Virtu collectively make markets in essentially every US-listed equity. Their edge: technology, scale, and tight risk management.
Why dark pools exist
An institution wanting to sell 500,000 shares of a stock that trades 1m/day faces a problem: if they put a 500,000-share sell order on the lit exchange, the price will move against them before they can complete. Dark pools solve this by hiding the order book. A buyer and seller can match in the dark; the trade prints after the fact at the midpoint of the prevailing public bid-ask. The institution gets size without information leakage.
Payment for order flow
US retail brokers (Robinhood, Schwab, TD Ameritrade) receive 'payment for order flow' from wholesalers like Citadel Securities and Virtu. The wholesaler executes the retail orders, often at slight price improvement to the public bid-ask. The arrangement: retail gets nominally better execution; the wholesaler captures the round-trip spread on a high volume of flow. Critics argue it creates conflicts of interest; defenders argue retail commissions are zero precisely because of PFOF revenue. The SEC has proposed reforms; the debate continues.
Equity trading at the NSE Kenya
NSE Kenya has ~60 listed companies, daily turnover typically <$5m. The market is concentrated: Safaricom alone is often 30-50% of daily volume. Liquidity for many mid-cap stocks is thin — bid-ask spreads of 50-200 bps are common. Most institutional flow is intermediated by a handful of brokers (Standard Chartered Securities, NCBA, AIB Capital, Faida, Genghis). There are no dark pools or ECNs — single venue, OTC for bonds. The market is investable but cost-of-trading and liquidity constraints shape strategies materially.
Exercise
Your fund holds 5% of a Kenyan mid-cap stock (e.g., 2m shares of a stock with 40m outstanding). Daily volume averages 100,000 shares. You want to exit the position. Walk through your execution options and the time horizon required.