Over the past year, buy-side traders have come to believe that higher usage and greater awareness of alternative trading technologies such as direct market access and algorithms are at least partly to blame for their inability to trade larger orders, Mr. Sussman said. But at the same time, the alternative trading technologies are unavoidable and even part of the solution.
"There's been an evolution in the way the buy side allocates its orders," he said. "The buy side is getting really good at determining where different orders should be routed — there are still some that should go to a sales trader, some that should go to an algorithmic box, some to direct market access and some to a crossing network. It's about different ways to execute different kinds of orders."
Some market participants acknowledged that technology both contributes to and helps solve fragmentation.
John Wheeler is head trader at American Century Investments, Kansas City, Mo. He believes technology plays a key role in solving the fragmentation problem.
"Certainly fragmentation is a concern, but we view it more as a technological challenge than a trading issue," he said. "The better technology you employ on your trading desk, the easier it is to access multiple liquidity sources simultaneously."
In addition, so-called liquidity aggregators — firms that sweep the market and find where liquidity is "hiding" — have become popular among buy-side firms because the aggregators allow them to execute trades without having to spend time finding liquidity first.
Aggregators include UNX Inc., Burbank, Calif., and Lava Trading Inc., which is owned by Citigroup, New York.
Another aggregator is Firefly Capital Inc., Boston, which launched what it calls a "venue management system" in June.
Brian O'Keefe, director of sales at Firefly, said the firm aggregates liquidity from ECNs, exchanges and alternative trading systems and hopes to include sell-side firms eventually.
"Technology is definitely solving the problem," he said.
Ted Oberhaus, director of equity trading at Lord, Abbett & Co. LLC, Jersey City, N.J., is a big believer in aggregators.
"Aggregators solve the problem" of fragmentation, he said. "Yes, fragmentation is here to stay, but as long as you have access to all potential (liquidity) venues, you are covered."
An informal poll of his trading desk suggested fragmentation "is not the issue it once was" because of the technology on the desk, which allows his traders to access multiple sources of liquidity at once, he said.
The situation is similar on the American Century trading desk.
"We put a lot of weight into finding technological solutions to that problem, and I think we've been pretty effective," Mr. Wheeler said. "The better technology you employ on your trading desk, the easier it is to access multiple liquidity sources simultaneously."
While liquidity aggregators "have come a long way" in solving the fragmentation problem, some new algorithms are doing a better job, he said.
"There are other algorithmic trading solutions that are coming online now that are truly agnostic about order routing and posting," he explained. "In the past, with some of the off-the-shelf tools, it was pretty evident that within their algorithms, they were considering (market) access fees, liquidity rebates and more economic incentives for the platform vs. best execution for the user."
According to the Tabb Group report, buy-side traders were mixed as to whether they thought algorithms solved fragmentation or contributed to it, with 7% taking the former position and 8% taking the latter.
Mr. Sussman said both sides could be right because with decimalization and market structure forcing firms to split orders, traders have found it difficult to trade without using algorithms.
Nine percent of buy-side traders said they used algorithms for best execution, but most said algorithms were only slightly more likely than traditional methods to achieve it.
As with many trading developments, quantitative managers and hedge funds are leading the charge in new uses of algorithms and other trading technology, which is likely to make fragmentation a permanent piece of the market landscape.