Smart order routing: Difference between revisions

Revision as of 00:22, 27 December 2017

Revision as of 01:55, 4 January 2019

Line 17:

Here are some US statistics from 2006-2007: "Smart order routing capabilities for options are anonymous and easy to use, and optimizes execution quality with each transaction". "In a study conducted earlier this year in conjunction with Financial Insights, BAS found that about 5% of all equity orders were executed using trading algorithms, with this number expected to increase to 20% by 2007”.<ref>{{Cite news|url=http://www.prnewswire.com/news-releases/banc-of-america-securities-announces-smart-order-routing-for-equity-options-55081342.html|title=Banc of America Securities Announces Smart Order Routing for Equity Options: New Product Supports Best Execution in Derivatives Markets|last=|first=|date=2006-01-24|work=PRNewswire|access-date=|via=}}</ref>

Smart order routing may be formulated in terms of an optimization problem which achieves a tradeoff between speed and cost of execution.<ref name="contkukanov">{{cite journal|last1=Cont|first1=Rama|last2=Kukanov|first2=Arseniy|title=Optimal order placement in limit order markets|journal=Quantitative Finance|volume=17|pages=21–39|date=2017-01-03|urldoi=http://www.tandfonline.com/doi/abs/10.1080/14697688.2016.1190030?journalCode=rquf20|accessdateciteseerx=31 January 201710.1.1.245.1411}}</ref>

== Benefits and disadvantages of Smart Order Routing ==

SOR provides the following benefits:<ref name=":0">{{Cite journal|last=Itkin|first=Iosif|title=Liquidity Fragmentation & SOR|url=http://www.slideshare.net/IosifItkin/liquidity-fragmentation-sor|journal=|volume=|date=2011-09-27}}</ref>

* Simultaneous access to several venues;

* Automatic search for the best Price;

Line 32:

== A brief concept ==

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’sBarron's|publisher=|publication-date=2005-04-25|volume=}}</ref>

Thus, SOR can involve a few stages:

Line 62:

==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|last=Gomber|first=Peter|last2=Gsell|first2=Markus|title=Catching up with technology – The impact of regulatory changes on ECNs/MTFs and the trading venue landscape in Europe|url=http://www.dbresearch.de/PROD/DBR_INTERNET_DE-PROD/PROD0000000000203508/Catching+up+with+technology+-+The+impact+of+regulatory+changes+___.pdf|journal=Competition and regulationRegulation in Network Industries|volume=|issue=The Future of Alternative Trading Systems and ECNs in Global Financial Markets}}</ref>

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" />