The Rise of Nonbank Liquidity Providers: Reshaping the Market Structure.

The financial services landscape is experiencing a profound transformation as nonbank liquidity providers (NBLPs) emerge as formidable forces in global capital markets. In 2024, nonbank liquidity providers (NBLPs) generated $25.6 billion through market making in equities, fixed income, currencies, and commodities (FICC)—a 22% increase from the previous year. While this figure remains dwarfed by the $132 billion generated by global investment banks, the rapid ascent of NBLPs signals a seismic shift in market dynamics that financial services executives cannot afford to ignore.

These technologically sophisticated entities—including high-frequency trading firms such as Jane Street and Citadel Securities, electronic market makers, and proprietary trading groups—are leveraging cutting-edge algorithms, machine learning, and ultra-low-latency infrastructure to capture market share from traditional bank-affiliated dealers. The implications extend far beyond simple competitive dynamics, touching on fundamental questions of market structure, systemic risk, and regulatory oversight.

The Scale and Velocity of Change

The numbers tell a compelling story of disruption. Jane Street has raced ahead of the market maker competition with 2024 net revenues, reporting US$20.5 billion for the year and taking more than 10% of the North American market. Meanwhile, Citadel Securities reported US$9.7 billion in revenues, underscoring the concentration of NBLP power among a select few players.

These figures represent more than statistical milestones—they reflect a fundamental reallocation of market-making capacity from traditional banks to agile, technology-first entities. Jane Street averaged US$2,407 billion in global equity trading volumes each month over 2024, demonstrating the scale at which these firms now operate across global markets.

Technology as the Great Differentiator

The ascendancy of NBLPs is intrinsically linked to their technological sophistication. Jane Street employed 2,631 people globally while generating $6.4m of revenues per person and $4.6m of profits annually, highlighting their operational efficiency. This productivity advantage stems from heavy investments in quantitative research, algorithmic trading systems, and real-time risk management capabilities that enable them to respond to market conditions with unprecedented speed and precision.

Unlike traditional banks, which are constrained by legacy systems and regulatory overhead, NBLPs have built their operations from the ground up around speed, automation, and data-driven decision-making. Their trading algorithms can process vast amounts of market data, execute thousands of trades per second, and dynamically adjust pricing based on real-time supply and demand conditions across multiple venues simultaneously.

Regulatory Pressures Fueling the Transition

The rise of NBLPs cannot be understood without examining the regulatory headwinds facing traditional banks. Post-2008 financial crisis regulations have fundamentally altered the economics of market making for large banking institutions.

The Basel III and Volcker Rule Impact

Regulators say the net effect of the proposal would be to increase the required highest-grade capital (essentially shareholders’ equity plus retained earnings) by about 16% on average, with a larger increase imposed on the largest banks. The capital requirement increase under Basel III Endgame represents a direct cost to banks’ market-making operations, making it more expensive for them to hold inventory and provide liquidity.

The Volcker Rule has created additional compliance burdens and restrictions on proprietary trading activities. The Volcker Rule aims to limit high-risk, speculative trading activities by banks, including proprietary trading and investments in, or sponsorship of, hedge funds or private equity funds. While market-making activities remain permitted, the increased documentation and compliance requirements have led to higher operational costs and reduced banks’ willingness to take on certain types of risk.

Capital Efficiency and Return Optimization

The technology and talent required to compete in quantitative market-making are becoming increasingly expensive, and the cost of holding inventory and the associated capital to support market-making can be prohibitively high during periods of market stress. Banks face a challenging calculus: deploy precious capital for market-making activities with relatively thin margins, or allocate those resources to higher-return businesses, such as investment banking or wealth management.

This economic reality has created opportunities for NBLPs, which face different regulatory constraints and capital structures. Private partnerships and proprietary trading firms can more readily adjust their risk appetite and capital allocation based on market conditions, without the burden of bank-specific regulations.

Market Structure Transformation: Fragmentation and Electronification

The growth of NBLPs is both driving and responding to fundamental changes in market structure. The proliferation of electronic trading venues has created a more fragmented but potentially more efficient ecosystem.

The Rise of Alternative Trading Systems

The introduction of MTFs has led to greater fragmentation in the financial markets since single securities may now list across multiple venues. This fragmentation, while creating complexity, has also fostered competition and innovation. Brokers responded by offering smart order routing (SOR) and other strategies to secure the best price between these many venues.

Multilateral Trading Facilities (MTFs) in Europe and Alternative Trading Systems (ATSs) in the United States have proliferated, offering alternatives to traditional exchanges. ATSs account for much of the liquidity found in publicly traded issues worldwide. These venues have created new opportunities for NBLPs to compete on execution quality, pricing, and speed.

Electronification Across Asset Classes

The transformation extends beyond equities into traditionally relationship-driven markets. NBLPs have carved out a presence in commodities, credit markets, foreign exchange, and digital assets, with crypto revenue now rivaling that of FX. Fixed income markets, long the domain of bank dealers, are experiencing particular disruption as electronic trading platforms like Tradeweb and MarketAxess gain traction.

This electronification trend plays directly to NBLPs’ strengths in algorithmic trading and real-time pricing. While banks maintain advantages in complex, bespoke transactions requiring human judgment and relationship management, standardized products are increasingly migrating to electronic venues where NBLPs excel.

Competitive Dynamics and Strategic Responses

The competitive landscape is characterized by intense innovation and rapid adaptation as market participants vie for market share and profitability.

NBLP Competitive Advantages

NBLPs possess several structural advantages that have enabled their rapid growth:

Speed and Latency: Purpose-built technology stacks enable execution speeds measured in microseconds, critical in high-frequency trading environments.

Capital Efficiency: As nonbanks, they face less onerous capital requirements and can deploy capital more dynamically based on market opportunities.

Risk Management: Sophisticated real-time risk systems allow for more precise position management and faster adjustment to changing market conditions.

Cost Structure: Lower regulatory compliance costs and streamlined operations enable competitive pricing while maintaining healthy margins.

Traditional Banks’ Strategic Options

Banks are pursuing multiple strategies to compete in this evolving landscape:

Electronic Trading Desk Enhancement: Major banks are investing heavily in upgrading their electronic trading capabilities and hiring quantitative talent. However, they face cultural and technological challenges in transforming legacy operations.

Partnership Models: Some banks are exploring partnerships with NBLPs, effectively outsourcing certain market-making functions while maintaining client relationships and risk management oversight.

Niche Focus: Banks are concentrating on areas where their advantages—deep client relationships, balance sheet capacity, and regulatory expertise—remain decisive, such as complex structured products and emerging market securities.

Technology Investment: Substantial investments in cloud computing, machine learning, and algorithmic trading are helping banks narrow the technology gap, though catch-up remains challenging.

Systemic Risk and Regulatory Implications

The growth of NBLPs raises important questions about financial stability and systemic risk that regulators are beginning to grapple with.

Concentration and Interconnectedness

The systemic risks nonbanks pose to the financial system were again evident when the COVID-19 pandemic first hit the United States in early 2020. The concentration of market-making activity among a relatively small number of large NBLPs creates potential single points of failure in critical markets.

Banks are directly connected to the NBFI sector entities via loans, securities, and derivatives exposures, as well as through funding dependencies. This interconnectedness means that stress in the NBLP sector could propagate rapidly to traditional banks, potentially amplifying systemic risks.

Liquidity Risk and Market Stress

NBLPs’ business models often rely on continuous access to funding and the ability to rapidly adjust positions. However, nonbanks face their own inherent liquidity risks and have a high degree of interconnectedness with banks. During periods of market stress, NBLPs may need to reduce their market-making activities precisely when liquidity is most needed.

The March 2020 market disruption highlighted these vulnerabilities when many NBLPs stepped back from market-making activities amid extreme volatility, contributing to liquidity shortages across multiple asset classes.

Regulatory Response and Evolution

The most extreme scenario is the formal designation of individual NBLPs (or entire categories) as systemically important, in the U.S. or elsewhere. Regulators are considering various approaches to address the systemic implications of NBLP growth:

Enhanced Supervision: Direct oversight of the largest NBLPs to monitor risk-taking and ensure adequate risk management practices.

Capital and Liquidity Requirements: Potential introduction of bank-like capital and liquidity requirements for systemically important NBLPs.

Stress Testing: Regular stress testing to assess NBLPs’ ability to continue providing liquidity during adverse market conditions.

Coordination Mechanisms: Enhanced coordination between NBLPs and central banks to ensure market functioning during crisis periods.

Geographic Variations and Regulatory Arbitrage

The regulatory landscape varies significantly across jurisdictions, presenting both opportunities and challenges for NBLPs and traditional banks.

European Market Developments

Europe’s MiFID II framework has been generally supportive of NBLP growth by promoting competition and transparency. MTFs have been launched in other asset classes as well; one of the examples is LMAX Exchange, an FCA-regulated MTF for trading spot FX and precious metals. However, European regulators are also becoming more focused on systemic risk implications.

U.S. Regulatory Environment

The U.S. market has seen particularly rapid NBLP growth, driven by favorable market structure rules and the competitive dynamics of the equity options market. However, regulators (in particular those outside the U.S.) have begun to examine the financing services that banks provide to NBFIs over the last 18 months, suggesting increasing scrutiny.

Emerging Market Considerations

In emerging markets, the growth of NBLPs is more limited due to lower levels of electronification and different market structures. However, this represents a significant growth opportunity as these markets continue to develop and modernize their trading infrastructure.

Buy-Side Adaptation and Execution Strategy Evolution

The rise of NBLPs is forcing institutional investors to reconsider their execution strategies and vendor relationships.

Execution Quality and Cost Considerations

Buy-side firms are increasingly evaluating execution quality across multiple dimensions beyond simple price improvement. Factors include:

Latency and Speed: The ability to execute trades quickly in fast-moving markets.

Market Impact: Minimizing the price impact of large orders through sophisticated execution algorithms.

Information Leakage: Reducing the risk that trading intentions become known to other market participants.

Venue Access: Access to diverse liquidity pools and trading venues through a single relationship.

Risk Management Evolution

Institutional investors are adapting their risk management frameworks to account for the changing market structure:

Counterparty Risk: Assessing the financial strength and risk management capabilities of NBLP counterparties.

Concentration Risk: Managing exposure concentration among a smaller number of market-making firms.

Operational Risk: Ensuring robust connectivity and fail-over procedures across multiple execution venues.

Technology Infrastructure and Innovation

The competitive advantage of NBLPs rests heavily on their technological infrastructure and continuous innovation capabilities.

Cloud Computing and Scalability

NBLPs are increasingly leveraging cloud computing platforms to achieve unprecedented scalability and computational power. This enables real-time analysis of vast datasets and the deployment of sophisticated machine learning models for trading and risk management.

Artificial Intelligence and Machine Learning

Advanced AI techniques are being deployed across multiple dimensions:

Price Discovery: Machine learning algorithms that identify pricing inefficiencies across venues and asset classes.

Risk Management: Real-time risk assessment and position adjustment based on multiple market indicators.

Order Management: Intelligent order routing that optimizes execution based on current market conditions.

Market Making: Dynamic spread setting and inventory management based on predictive models.

Low-Latency Infrastructure

The arms race for speed continues to drive innovation in hardware and network infrastructure. NBLPs invest heavily in:

Colocation Services: Physical proximity to exchange matching engines to minimize network latency.

Specialized Hardware: Field-programmable gate arrays (FPGAs) and other specialized processors optimized for trading applications.

Network Optimization: Direct fiber connections and optimized network protocols to reduce transmission delays.

Capital Markets Evolution and Future Trends

The rise of NBLPs is part of broader trends reshaping global capital markets.

Democratization of Market Access

Electronic trading and the proliferation of alternative venues are making market access more democratized. Smaller institutions and regional players can now access the same technological capabilities and execution venues previously available only to the largest banks.

Data and Analytics Revolution

The increasing availability of market data and analytics is leveling the playing field in some areas while creating new competitive advantages in others. NBLPs that can effectively harness alternative data sources and advanced analytics gain a significant edge.

Environmental, Social, and Governance (ESG) Considerations

Growing focus on ESG factors is influencing market structure and creating new opportunities for NBLPs. Specialized green trading platforms and ESG-focused execution algorithms represent emerging growth areas.

Regional Market Dynamics

Asia-Pacific Developments

The Asia-Pacific region presents unique opportunities and challenges for NBLPs. Markets like Hong Kong and Singapore have well-developed electronic trading infrastructure, while others like India and Indonesia are rapidly modernizing. In July 2025, the Indian stock market regulator SEBI banned Jane Street Capital in India for market manipulation of BANKNIFTY & NIFTY50 index options. This incident highlights the regulatory challenges NBLPs face as they expand into diverse jurisdictions.

Latin American Markets

Latin American markets are experiencing gradual electronicization, creating opportunities for NBLPs as these markets develop more sophisticated trading infrastructure. However, currency volatility and political risk create additional complexities for international NBLPs.

African Market Potential

African capital markets represent a significant long-term opportunity as infrastructure development and regulatory modernization continue. NBLPs that establish early positions in key African markets may benefit from first-mover advantages.

Risk Management and Operational Resilience

As NBLPs assume greater systemic importance, their risk management and operational resilience capabilities become increasingly critical.

Cybersecurity Challenges

NBLPs face heightened cybersecurity risks due to their reliance on technology and their access to sensitive market data. Key considerations include:

Data Protection: Safeguarding proprietary trading algorithms and client order information.

System Availability: Ensuring continuous operation of trading systems during market hours.

Regulatory Compliance: Meeting evolving cybersecurity requirements across multiple jurisdictions.

Business Continuity Planning

Robust business continuity plans are essential for NBLPs given their critical role in market functioning:

Backup Trading Venues: Redundant connections to multiple trading venues and exchanges.

Geographic Diversification: Distributed technology infrastructure to reduce single points of failure.

Staff Redundancy: Cross-trained personnel and remote work capabilities to maintain operations during disruptions.

Competitive Landscape Analysis

Market Share Dynamics

The market-making landscape is characterized by intense competition among a relatively small number of large players. Virtu’s net trading revenues for its market-making business (which excludes its agency broker) as a proportion of Citadel Securities’ net trading revenues were 27% in 2020, 20% in 2021, and have fallen to 14% since. This demonstrates the winner-take-all dynamics that characterize this industry.

Profitability and Scale Economics

The most successful NBLPs demonstrate impressive profitability metrics. Citadel Securities’ revenue per head of US$3.8m is just below Jane Street’s US$4.2m, while remaining around twice the level of options market maker Optiver and three times higher than Virtu. These figures underscore the importance of scale and operational efficiency in this business.

Innovation and Differentiation

Leading NBLPs continue to invest heavily in innovation to maintain competitive advantages:

Algorithm Development: Continuous refinement of trading algorithms to improve execution quality.

Product Expansion: Extension into new asset classes and geographic markets.

Client Services: Enhanced analytics and reporting capabilities for institutional clients.

Strategic Implications for Financial Services Executives

The rise of NBLPs presents both challenges and opportunities for financial services executives across the industry.

For Bank Leadership

Traditional banks must make strategic decisions about their market-making businesses:

Investment Priorities: Whether to compete directly with NBLPs through technology investment or focus on areas of sustainable competitive advantage.

Partnership Opportunities: Exploring collaboration models that leverage NBLPs’ technological capabilities while maintaining client relationships.

Portfolio Optimization: Reallocating resources from low-margin market-making activities to higher-value services.

For Buy-Side Institutions

Institutional investors need to adapt their execution strategies:

Vendor Evaluation: Developing frameworks to assess NBLP execution capabilities and risk profiles.

Cost-Benefit Analysis: Balancing execution quality improvements against potential risks and costs.

Technology Investment: Upgrading internal systems to take advantage of enhanced execution capabilities.

For Regulatory Bodies

Regulators face the challenge of fostering innovation while maintaining financial stability:

Systemic Risk Assessment: Developing frameworks to monitor and assess systemic risks from NBLP activities.

International Coordination: Harmonizing regulatory approaches across jurisdictions to prevent regulatory arbitrage.

Innovation Support: Balancing prudential concerns with the benefits of technological innovation.

Market Structure Predictions and Scenarios

Looking ahead, several scenarios could shape the evolution of the NBLP landscape:

Scenario 1: Continued NBLP Dominance

In this scenario, NBLPs continue to capture market share across asset classes, potentially reaching 30-40% of market-making revenues within the next decade. Traditional banks retreat to specialized niches, and new entrants continue to emerge.

Scenario 2: Regulatory Intervention

Concerns about systemic risk lead to significant regulatory intervention, potentially including capital requirements for large NBLPs or restrictions on certain activities. This could slow NBLP growth and provide opportunities for banks to reclaim market share.

Scenario 3: Technology Convergence

Banks successfully close the technology gap through investment and partnerships, leading to a more balanced competitive landscape. Innovation accelerates across the industry, benefiting end clients through improved execution quality.

Scenario 4: Market Consolidation

Competitive pressures and regulatory requirements lead to consolidation among NBLPs, with only the largest and most well-capitalized firms surviving. This could reduce competition and potentially increase systemic risk concentration.

Navigating the New Paradigm

The rise of nonbank liquidity providers represents more than a cyclical shift in market dynamics—it signals a fundamental transformation in how capital markets operate. Financial services executives must recognize that this change is both irreversible and accelerating.

The implications extend across multiple dimensions: competitive strategy, risk management, regulatory compliance, technology investment, and client service. Organizations that adapt quickly and thoughtfully to this new paradigm will be best positioned to thrive, while those that resist change risk obsolescence.

For traditional banks, the challenge lies in determining where they can maintain sustainable competitive advantages while acknowledging areas where NBLPs may prove superior. This requires honest assessment of capabilities, strategic focus on differentiated services, and potentially, new partnership models that leverage the strengths of both bank and nonbank entities.

For institutional investors, the proliferation of NBLPs creates opportunities for better execution but also requires enhanced due diligence and risk management. The complexity of managing relationships across multiple NBLPs and venues demands sophisticated operational capabilities and clear strategic frameworks.

For regulators, the growth of NBLPs necessitates evolving oversight frameworks that balance innovation encouragement with financial stability protection. This requires international coordination, given the global nature of capital markets and the mobility of trading activities.

The market-making landscape of 2030 will likely look dramatically different from today, with NBLPs playing an even more prominent role in global capital markets. The organizations that begin adapting today will be best positioned to succeed in this transformed environment. Those who delay risk finding themselves increasingly marginalized in markets that have moved beyond their traditional approaches.

The era of bank-centric liquidity provision is giving way to a more diverse, technology-driven ecosystem. While this transition presents challenges, it also offers the promise of more efficient, transparent, and competitive markets. Success in this new paradigm will belong to those who can combine technological sophistication with robust risk management, deep market expertise, and unwavering focus on client needs. The future belongs to the adaptive, the innovative, and the strategically focused, regardless of whether they operate within traditional banking structures or as pioneering nonbank entities.