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{{unreliable sources|date=April 2013}}
'''Smart order routing''' ('''SOR''') is an automated process of handling [[Order (exchange)|orders]], aimed at taking the [[best execution |best available opportunity]] throughout a range of different [[trading venue]]s.<ref>{{cite news |newspaper=[[Wall Street Journal]] |url=https://www.wsj.com/articles/SB119785381762232795 |quote=had led banks and brokers ... to offer smart order routing |title=Brokers doubt forecastsof trading fragmentation |first=Luke |last=Jeffs |date=December 17, 2007}}</ref><ref>{{cite book |title=Market Liquidity: Theory, Evidence, and Policy|quote=They often use smart order-routing technologies to ... |first1=Thierry |last1=Foucault |first2=Marco |last2=Pagano |first3=Ailsa |last3=Röell |year=2013}}</ref>
The increasing number of various trading venues and [[Multilateral trading facility|MTFs]]
== History
===1980s===
The forebears of today's smart order routers appeared in the late 1980s: "In an attempt to lock in the client order flow and free traders up from smaller trades, in order to handle the larger trades, many of the larger broker dealers began to offer a new service called
'''{{visible anchor|Direct Order Turnaround}} or DOT'''.<ref name=DOT.NYT1988>{{cite
|url=https://www.nytimes.com/1988/01/15/business/stock-exchange-sets-test-to-curb-program-trading.html
|title=Stock Exchange sets test to curb Program Trading
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By 1988, '''SuperDOT''' included "roughly 700 communications lines that carry buy and sell orders."<ref>{{cite magazine
|magazine=[[Network World]]
|date=October 17, 1988 |page=7 |title=}}</ref>
===1990s===
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|title=Optimal order placement in limit order markets
|journal=Quantitative Finance |volume=17 |pages=21–39 |date=2017-01-03
|doi=10.1080/14697688.2016.1190030 |citeseerx=10.1.1.245.1411|s2cid=14652208 }}</ref>
== Benefits and disadvantages
SOR provides the following benefits:<ref name=":0">{{Cite web|last=Itkin|first=Iosif|title=Liquidity Fragmentation & SOR|url=http://www.slideshare.net/IosifItkin/liquidity-fragmentation-sor|date=2011-09-27}}</ref>
* Simultaneous access to several venues;
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* Transparency of information, concerning your transactions, for the third party;
==
The idea of Smart Order Routing is to scan the markets and find the best place to execute a customer's order, based on price and liquidity.<ref>{{Cite journal|title=Stocks for Jocks|url=http://www.investorbrain.com/index.php/logicalblocks/2005/04/|journal=Barron's|date=2005-04-25}}</ref>
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==Algorithmic trading and SOR==
The classic definition of Smart Order Routing is choosing the best prices and order distribution to capture liquidity. "Forwarding orders to the "best" out of a set of alternative venues while taking into account the different attributes of each venue. What is "best" can be evaluated considering different dimensions – either specified by the customer or by the regulatory regime – e.g. price, liquidity, costs, speed and likelihood of execution or any combination of these dimensions".<ref name=":2">{{Cite journal|
In some cases, algorithmic trading is rather dedicated to automatic usage of synthetic behavior. "Algorithmic trading manages the "parent" order while a smart order router directs the "child" orders to the desired destinations."<ref name=":1" />
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However, smart order routing and algorithmic trading are connected more closely than it seems. Since even Smart Order Routing can be considered the simplest example of algorithm, it is reasonable to say that algorithmic trading is a logical continuation and an extension of Smart Order Routing.
This is a common example of a simple Smart Order Routing strategy
Having the initial Order Book, the SOR strategy will create child orders, that is orders which aim at completing the initial SOR parent order. These orders can either be aggressive or passive depending on the current context and the SOR algorithm. In this example [[Immediate or cancel|IOC]] (immediate or cancel) orders are used:
{| class="wikitable" style="text-align:center"
! colspan="2" |Preferred venue
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1) An SOR Buy Day order for 1000@21.5 comes;
2) Aggressive child order to grab opportunity on preferable venue created: Buy IOC 100@21.5;
3) Aggressive child order to grab opportunity on Venue 1 created: Buy IOC 200@21.5;
4) The remaining part placed passive to the Preferred venue:
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Some institutions offer cross-border routing for inter-listed stocks. In this scenario, the SOR targeting logic will use real-time FX rates to determine whether to route to venues in different countries that trade in different currencies. The most common cross-border routers typically route to both Canadian and American venues; however, there are some routers that also factor in European venues while they are open during trading hours.
==
* [[Best execution]]
* [[Central limit order book]]
* [[
* [[
==References==
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