[treis]

>By regulation, the users can never be worse off than they would have otherwise been, because liquidity providers must run their bid-ask spread within the larger market's spread.

But TFA clearly demonstrates how they are. By removing retail investors the order flow to public market makers is much riskier. Those market makers will respond by increasing the spread to account for the increased risk. So yes, the retail investors get a price that is (very slightly) better than public price but the public price is dramatically worse than it otherwise would be. It's a net loss for the retail investor and public market maker while being a win for the internalized market makers.

[LiamMcCalloway]

I don't know enough - merely rephrasing a blog post here - but it sounds fair to say that this reduces the primary benefit of network effects of market activity, higher liquidity/lower spread, at the expense of the rest of the market.

Could we construct a reasonable scenario where the liquidity from segregated order flow would have displaced the core business of liquidity providers, because the volume is so large?