The financial markets have undergone a significant transformation in recent years, driven by advancements in technology and functional developments in trading protocols. Innovations in liquidity and price discovery mechanisms are shaping the market structure, making trading more efficient, transparent, and scalable.
Industry experts believe that the evolution of market protocols stems from the experience of market practitioners who identify inefficiencies and develop solutions to enhance liquidity, as it was heard at Liquidity Discovery panel discussion at FIA Boca on March 11.
Liquidity in today’s markets is a function of multiple interdependent factors, including order flow, execution speed, and data transparency. As Tal Cohen, President, Nasdaq, said, pre-Covid, the Exchange processed around 40 billion messages per day. By 2022, this number surged to 60–70 billion, and in 2025, “we are witnessing over 100 billion daily messages”. “Managing this unprecedented volume requires sophisticated solutions to avoid fragmentation and inefficiencies,” he said.
One breakthrough in liquidity management is the application of AI-driven dynamic strike optimization in options markets. With over 5 million strikes in the system, AI identifies quoting and trading activity patterns, eliminating inactive strikes to reallocate capacity efficiently. This approach reduces operational risk and complexity while enabling innovation without overloading market infrastructure.
“By leveraging AI, we ensure that market participants can focus on meaningful trading opportunities without unnecessary market noise,” said Cohen. “This optimization enhances liquidity provisioning and ensures that exchanges remain resilient amid growing data volumes.”
Market fragmentation remains a challenge, as multiple trading venues and order types create inefficiencies, noted Mike Kuehnel, Chief Executive Officer, Flow Traders.
“One challenge is fragmentation across different markets, reaching the median processing classes,” he said.
As liquidity pools disperse, price discovery becomes more complex. Participants must navigate a landscape where transactions occur both on-screen and off-screen, impacting transparency.
Liquidity today is more than just a technological solution. It’s about aligning incentives across exchanges, market makers, and traders to ensure that liquidity is accessible and efficient.
In Europe, for example, the shift toward off-screen trading in options markets is accelerating. Traditionally, about 50% of trading occurred off-screen, but that number is increasing, commented Robbert Booij, CEO, Eurex. Market makers and institutional investors often prefer off-screen trading for risk management reasons, as it allows for more controlled execution strategies.
To address these challenges, exchanges are introducing new liquidity provisioning models. “The only good quote is a traded quote. We are moving beyond just spreading the market with quotes; we need to ensure meaningful execution,” Booij said.
Digital assets and tokenization are reshaping market structures, bridging the gap between traditional financial systems and decentralized finance (DeFi). While some investors see digital assets as a disruptive force, others view them as an extension of existing market structures.
“We are not looking to replace traditional finance but to create a seamless ecosystem where digital and traditional assets coexist,” said Kuehnel. “Tokenization and blockchain technology offer opportunities for more efficient settlement processes and enhanced liquidity provisioning.”
As regulators and market participants explore the implications of tokenization, ensuring that liquidity remains intact across asset classes is crucial. Some institutions are already integrating AI-driven liquidity management systems to adapt to the evolving landscape.
Looking ahead, the next frontier of market structure evolution involves balancing segmentation and centralization. Market participants seek to maintain transparency while optimizing order execution efficiency. The key questions remain:
- Is price discovery as effective as it should be?
- Are investors accessing the best possible prices?
- Is liquidity being concentrated or fragmented across multiple venues?
While liquidity attracts liquidity, an over-fragmented market can diminish its effectiveness. Exchanges, clearinghouses, and liquidity providers must work together to ensure that market structures evolve in a way that benefits all participants.
As Booij put it: “The combination of an exchange with a multi-asset clearinghouse creates efficiency and attracts liquidity. Investors don’t just seek the best price—they seek stability, transparency, and operational efficiency.”
In conclusion, innovation in liquidity and price discovery is a combination of technological advancements and refined trading protocols. The market’s future will depend on how well participants can integrate AI, optimize liquidity structures, and balance fragmentation with efficiency. The ongoing evolution of financial markets requires a holistic approach that incorporates technology, regulation, and market expertise to sustain growth and resilience.
