The US Securities and Exchange Commission’s recent decision to permit third parties to offer tokenized stocks without issuer approval has triggered concerns about potential disruptions in market structure. Research from Tiger Research highlights two main risks: liquidity fragmentation and revenue fragmentation.
Liquidity fragmentation arises as trading activity spreads across multiple blockchain platforms instead of concentrating on traditional centralized exchanges like the NYSE or Nasdaq. This dispersion can cause price discrepancies, increased slippage on large trades, and overall reduced market efficiency. When tokenized stocks of the same company trade on various platforms, the capital and order volume that would normally centralize disperse, undermining the efficiency of price discovery and trading.
Alongside liquidity issues, revenue fragmentation poses another challenge. As tokenized stock trading migrates across a fragmented network of decentralized platforms, fees and financial revenues that previously benefited domestic exchanges risk flowing offshore. This shift may weaken national financial competitiveness and presents dilemmas for both incumbent financial institutions and regulators trying to maintain market integrity.
Capital fragmentation is already evident. The decentralized exchange Hyperliquid recently recorded a peak in open interest for real-world assets (RWA), indicating that more investor capital is moving into tokenized asset markets. Although tokenized stocks currently represent a relatively small portion of the total on-chain RWA value, their growth raises significant questions about the future landscape of securities trading.
Industry experts warn about the dangers of fragmented markets, where disconnected liquidity pools might lead to price tracking errors or vulnerabilities such as shadow-shorting, which can destabilize token prices in the absence of localized buyers. SEC Commissioner Hester Peirce has stated that any exemptions will be narrowly defined, applying only to digital representations of securities identical to those available in the current secondary market, though final rules remain pending.
Despite these challenges, proponents emphasize that tokenized stocks could offer notable benefits including faster settlement times, fractional ownership opportunities, lower transaction costs, and the ability for 24/7 global trading. This increased accessibility could open US stock markets to international investors without traditional brokerage restrictions, expanding market inclusiveness.