Sam Hall

‹ How markets actually work

Venues & plumbing

M0 — How markets actually work

This item ties together the institutions you met in M0.3 and shows the whole ecosystem. The headline: the market isn’t one place. In the US it’s deeply fragmented — ~16 exchanges plus dozens of dark pools and wholesalers — stitched together by regulation.

   ┌──────────┐   order   ┌──────────┐  routes  ┌──────────────────────┐
   │ INVESTOR │ ────────▶ │  BROKER  │ ───────▶ │  VENUES               │
   └──────────┘           └──────────┘          │  • exchanges (lit)     │
        ▲                                        │  • dark pools / ATS    │
        │ holds shares                           │  • wholesalers (PFOF)  │
        │ (custody)                              └──────────┬───────────┘
        │                                                   │ trade
   ┌──────────┐   settle T+1   ┌──────────┐   clear  ┌──────▼──────┐
   │ CUSTODIAN│ ◀───────────── │   CSD     │ ◀─────── │    CCP       │
   │           │                │ book-entry│          │ novate + net │
   └──────────┘                └──────────┘           │ + margin     │
                                                       └─────────────┘
   all wrapped in regulation:
     SEC / FINRA (US) · FCA (UK) · ESMA (EU) · Reg NMS · MiFID II

Venues — where trades happen

  • Exchanges (lit) — NYSE, Nasdaq, LSE, CME. Public, regulated, displayed order book.
  • Dark pools / ATSs — private matching venues with no pre-trade transparency; used to trade size without showing it.
  • Wholesalers / internalizers — fill retail flow off-exchange (the PFOF destination from M0.3).

Fragmentation raises an obvious problem: if a stock trades in 40 places, how do you not get a worse price than is available elsewhere? Reg NMS answers it with the NBBO (national best bid/offer) and an order-protection rule that forbids “trading through” a better displayed price on another venue. Europe’s analogue is MiFID II.

Intermediaries

  • Broker — your agent; best-execution duty; routes your order (M0.3).
  • Market maker / dealer — provides the liquidity (M0.4).
  • Custodian — holds your assets safely on your behalf.

Clearing & settlement (the back office)

  • CCP / clearing house — NSCC (US equities), LCH, ICE Clear. Novation (becomes counterparty to both sides), netting (only net positions settle), and margin (collateral against the risk in the gap).
  • CSD (central securities depository) — DTC (US), Euroclear, Crest (UK). Securities live here in book-entry form (no paper certificates).
  • Settlement — cash ⇄ ownership, T+1 for US equities (M0.3).

Why it matters: the plumbing is invisible until it breaks

The Feb 2021 GameStop/Robinhood episode was exactly a clearing-margin event: as the stock went vertical, the CCP demanded a huge collateral deposit against Robinhood’s volatile, one-directional retail buying. Robinhood couldn’t post it fast enough, so it restricted buying. Not a conspiracy — the plumbing doing precisely what M0.6 says it does. That’s the whole module made concrete.

Source: Harris on market structure & fragmentation; the SEC market-structure primers (sec.gov/marketstructure) on Reg NMS and the NBBO. For a vivid case, read any post-mortem of the Feb 2021 GameStop clearing-margin episode.