by AdvisorAnalyst.com Editorial Team
The trading pits of Wall Street lore, crowded with shouting brokers competing for every order, are gone. In their place stand data centers running algorithms that execute in nanoseconds, operated by a small group of firms most investors have never heard of. According to a spring 2026 working paper 1 by Jonathan Brogaard of the University of Utah and Yesha Yadav of Vanderbilt Law School, this structural transformation has produced a concentration of market-making power with no real historical precedent and with regulatory frameworks that lag dangerously behind.
The New Architecture of Market Making
Two firms, Citadel Securities and Virtu Financial, intermediate approximately 70% of all retail equity orders in the United States. Citadel alone handles one in four U.S. stock trades, processing around $450 billion in daily volume. Jane Street, meanwhile, intermediated roughly 14% of all ETF trading in 2023 and accounted for 41% of bond ETF creation and redemption activity. DRW intermediated 29% of options and 13% of futures on the Intercontinental Exchange.
The authors argue this dominance was not accidental. It was structural. When the NYSE abolished its specialist system in 2008, it removed a codified regime of affirmative obligations that had required designated traders to maintain liquidity even at a loss to themselves. What replaced it was voluntary, functional, and unconstrained. Brogaard and Yadav observe that the shift produced "a new paradigm" in which "HFT market makers are not typically subject to a dedicated rulebook for this specific role." Any firm with sufficient speed and capital can now function as a market maker, and those that do it best face no ceiling on the market share they can accumulate.
High-frequency trading economics compound this dynamic. Because gains per trade are microscopic, only the fastest trader captures meaningful returns. Brogaard and Yadav note that "firms that are already successful are more likely to become concentrated over time," and that increased competition does not erode profits the way it would in conventional industries, because a marginal upgrade in speed is enough to stay at the top. The result is winner-takes-all concentration reinforced by each successive quarter.
Too Few to Fail, but Not Too Big to Bail Out
The paper resists the reflexive comparison to too-big-to-fail banks. HFT market makers do not borrow from depositors, do not accumulate long-dated toxic exposures, and are designed to end each trading day flat. When Knight Capital collapsed in 2012 while intermediating 16-17% of NYSE and Nasdaq volume, it failed without triggering cascading insolvencies. No government bailout was required.
Yet Brogaard and Yadav warn that the absence of systemic contagion does not mean the absence of serious harm. Concentration creates systemic dependence on liquidity quality even when it does not create systemic dependence on solvency chains. The loss of a dominant market maker, they argue, "can decimate the quality of the trading experience for investors and for trading to be capable of conveying reliable information in prices." With retail participation now representing 20% of all equity volume, and with zero-commission platforms having drawn in younger and underrepresented investors, the downstream consequences extend well beyond institutional desks.
The Regulatory Bind
Regulators face twin deficits. Informationally, public supervisors are structurally disadvantaged because the largest market makers operate across equities, Treasuries, derivatives, and ETFs simultaneously while regulators remain organized by asset class and jurisdiction. When the 2014 Treasury market anomaly was investigated, it took the CFTC two months to authorize data sharing with other federal agencies, and some data was simply unavailable.
The enforcement dilemma is equally sharp. Brogaard and Yadav point to SEBI's July 2025 temporary ban on Jane Street from Indian markets following manipulation allegations, which caused Indian equity options volume to fall by one third within three weeks. The episode illustrated the paradox: "in a system where liquidity provision is mostly voluntary, regulatory action comes with a complex set of costs."
Two Proposed Solutions
The authors propose two targeted interventions. First, an ex-ante living will requirement for firms above defined volume thresholds, forcing them to map their cross-market exposures, stress-test their algorithms, and disclose their contingency funding to regulators. Second, an ex-post emergency liquidity fund, pre-funded through volume-based contributions or per-transaction micro-charges, accessible only to the most concentrated market makers to sustain liquidity provision during crises rather than permitting a rational but collectively destructive exit.
5 Key Takeaways for Advisors and Investors
- Retail execution quality depends on two firms. Citadel and Virtu intermediate approximately 70% of retail equity orders. Any disruption to either firm directly affects the speed, cost, and reliability of trades placed by everyday investors.
- Concentration is structural, not accidental. The winner-takes-all economics of high-frequency trading reward speed above all else, and those already winning face no regulatory limit on how much market share they can accumulate.
- The failure risk is liquidity disruption, not systemic insolvency. Unlike banks, HFT market makers do not create cascading solvency crises when they fail. The danger is a sudden, severe, and potentially prolonged deterioration in market quality.
- Regulators are informationally outmatched. The largest market makers operate across asset classes and jurisdictions simultaneously while regulatory oversight remains siloed. Meaningful preventative supervision is structurally difficult today.
- The proposed solutions are industry-funded. Both the living will framework and the emergency liquidity fund place the cost burden on the firms that benefit most from concentration rather than on taxpayers, aligning private incentives with the public interest in market continuity.
Footnote:
Yadav, Yesha, and Jonathan Brogaard. “The Too Few To Fail Traders In Modern Markets.” N.p., n.d. Web. 25 June 2026.
