Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Individual Traders Reshaped Market Liquidity in 2026
Transcript
- Lucas: So the S&P 500 closed today at 7,600 — up one point one percent on the week. The VIX dropped to 16 even. That combination typically says calm markets, smooth sailing, nothing to see here. But underneath that surface, something in the market plumbing has quietly changed. Luna: You're talking about retail order flow, aren't you? I saw that Kalshi — the prediction market platform built on individual traders — just announced a big push toward institutional clients. Lucas: Exactly. Kalshi's move is a microcosm of a much bigger trend. Individual traders now drive a significant chunk of intraday liquidity — and the institutions are having to completely rewire how they execute. The old assumption that retail orders are just noise is dead. Luna: And it's not just meme stocks or options crazes anymore. This is structural. I've seen estimates that retail accounts for roughly 25 percent of all equity volume on some exchanges now. Lucas: That's right. And it's not evenly distributed. Retail flow tends to cluster in specific names and specific times of day — the first hour, the last hour, and around news events. That creates liquidity pools that are deeper but also more episodic. For a day trader, that means the game has changed. Luna: Walk me through the mechanics. How did we get here? Lucas: It starts with payment for order flow. Brokers like Robinhood and Webull route customer orders to market makers who pay them for the flow. Those market makers — Citadel Securities, Virtu, Susquehanna — can internalize the orders, matching buyers and sellers internally without ever sending them to the public exchange. Luna: Right, so the retail orders get executed off-exchange, in what are effectively dark pools. But that means the quoted spreads on the public exchange might not reflect the real price of liquidity. Lucas: Exactly. The National Best Bid and Offer, the NBBO, is still the benchmark, but a huge volume of trades happen inside that spread. For a day trader trying to read the tape, this creates a kind of illusion. You see a certain volume on the tape, but the real depth might be elsewhere. Luna: And that gets even more interesting when you consider that market makers can see the retail flow coming. They can predict the direction of the flow — retail tends to buy momentum, sell into weakness — and they can adjust their pricing accordingly. Lucas: That's the informational asymmetry. The market maker knows the flow is mostly dumb retail money — no offense to retail traders — and can lean against it. But the flip side is that when retail flow is large and one-sided, the market maker can also get run over. That's what happened in the GameStop squeeze. Luna: So for the active retail trader — the day trader listening to this show — how do you navigate a market where the liquidity is fragmented and the big players know your flow? Lucas: The first thing is to be aware of the order types you're using. If you're using a market order, you're giving the market maker an edge. Limit orders, particularly those that sit on the bid or ask, can actually get you better execution because you're providing liquidity. And some brokers now offer 'liquidity rebates' for adding liquidity rather than taking it. Luna: But doesn't that require more patience? If you're trying to get in and out quickly, sitting on a limit order might not work. Lucas: It does take a different mindset. But there are strategies that exploit the fragmentation. For example, you can watch the time and sales for unusual prints — large trades that might indicate institutional activity. Or you can use multi-exchange data to see where the real depth is. The key is understanding that the simple tape you see on most retail platforms is only one slice of the picture. Luna: And there's the VIX term structure. The VIX itself is down, but the VVIX — the volatility of volatility — ticked up to 90.75 today. That's a divergence that often signals institutional hedging. They're worried about a tail event even if the headline VIX says calm. Lucas: Good catch. The VVIX divergence suggests that market makers and institutions are buying protection further out. That could be a reaction to the liquidity fragmentation itself — because when liquidity dries up, the market can gap sharply. So the VVIX is pricing in that risk. Luna: And I think that connects back to Kalshi. As retail traders become more sophisticated, they're also using platforms like Kalshi to express macro views — election odds, Fed decisions, even geopolitical events. That's another form of retail order flow, but in a different asset class. Lucas: One thing I've noticed — and this is an aside — is that a lot of the conversation around these tools and ideas comes from listeners who tell us they've changed how they think about their own trading. And honestly, that's the whole reason we do this show. A couple of dollars a month is genuinely what keeps these conversations going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it makes a real difference. We don't have advertisers pushing us to cover specific topics, so we can go wherever the data leads. Lucas: Exactly. So back to the liquidity picture — another thing that's changed is the role of the NYSE and Nasdaq. They've been trying to attract more retail flow by offering their own retail liquidity programs. The NYSE's 'Retail Liquidity Program' gives retail orders special treatment, effectively paying brokers for access. Luna: So the exchanges are competing directly with the off-exchange market makers. That's a big shift. Lucas: It is. And it means that the fragmentation is getting even more complex. For a day trader, the takeaway is that you can't just look at level 2 data from one exchange. You need a consolidated view. Some of the newer platforms — like TradeStation's Sterling Pro or Lightspeed — offer that kind of aggregated data. Luna: But that also means more screen time, more data to process. Not everyone can do that. Lucas: True. So a simpler approach is to focus on the times of day when retail flow is most concentrated. The first 30 minutes and the last 30 minutes are where the volume is. If you're trading during the lunch hour, you're swimming in shallower waters. Luna: And it's worth noting that the Russell 2000 — which is a common hunting ground for retail — was actually down 0.4 percent this week. So the small-cap trade that's been working might be losing steam. Lucas: Right. The RUT at 2,909 is off its recent highs. If retail flow rotates out of small caps, that could accelerate the move. Day traders need to watch the correlation between retail flow and small-cap performance. If retail sells, small caps could get hit harder than large caps because the liquidity is thinner. Luna: So the same forces that create liquidity can also destroy it if the flow reverses. Lucas: Exactly. And that's the paradox of retail liquidity. It makes markets more efficient in normal times, but it can amplify dislocations in stress. The key for a day trader is to understand that and position accordingly. Use limit orders, be aware of the time of day, and watch the VIX term structure for warning signs. Luna: And maybe keep an eye on Kalshi's next move. If they succeed in attracting institutional clients, that could pull some of the retail flow out of equities and into prediction markets. Lucas: That's a great point. The lines between asset classes are blurring. For now, the takeaway is clear: retail order flow is no longer a sideshow. It's a main feature of market structure, and day traders who ignore it are trading blind.