Smart order routing: Difference between revisions

Revision as of 10:21, 1 November 2016

Revision as of 10:26, 1 November 2016

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The forebears of today's smart order routers appeared in 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 Direct Order Turnaround or DOT. DOT boxes were the the first electronic machines to provide the institutional buy-side with what we now call “direct sponsored access”, they, however, were not very smart yet (they could be directed to only one destination, the New York Stock Exchange)".<ref name=":1">{{cite journal|last1=O’Conor|first1=Michael|title=Smart or Out‐Smarted?|journal=Jordan & Jordan|date=03.06.2009|url=https://www.jandj.com/sites/default/files/library/Smart_Order_Routing_article_final_03-06-2009.pdf|accessdate=31 October 2016}}</ref>

It was in the USA, in late 1990s, that the first instances of Smart Order Routers appeared: "Once [[alternative trading systemssystem]]s (ATSes) started to pop up in U.S. cash equities markets … with the introduction of the U.S. [[Securities and Exchange Commission’sCommission]]’s (SEC’s) Regulation ATS and changes to its order handling rules, smart order routing (SOR) has been a fact of life for global agency broker Investment Technology Group (ITG)."<ref>{{Cite news|url=http://www.smart-trade.net/wp-content/uploads/2012/12/DWT1005_SmartOrderRouting_Report_web.pdf|title=Navigating the Future of Smart Order Routing|last=|first=|date=05.10.2009|work=Dealing with Technology Special Report|editor-last=Daly|editor-first=Rob|access-date=|via=}}</ref>

As a reaction to the introduction of [[Markets in Financial Instruments Directive 2004|MiFID]] (Europe) and [[Regulation NMS|Reg NMS]] (USA), Smart Order Routers proliferated in Europe in 2007-2008, their sole purpose consisting in capturing [[Lit pool|liquidity on lit venues]], or doing an aggressive or a passive split, depending on the market data. Later the SOR systems were enhanced to cope with [[High-frequency trading|High Frequency Trading]], to decrease latency and implement smarter algorithms, as well as work with [[Dark liquidity|dark pools]] liquidity.

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* Settings/preferences of a certain client;

* The state of available markets/market data;

Venue parameters, such as average latency, commission, and rank can be used to prioritize certain venues. Custom algorithms, like synthetic orders (peg, iceberg, spraying, [[TWAP]]), can be used to manage orders automatically, for instance, if a specific client has certain routing preferences among several brokers, or certain rules for handling of incoming, or creation of outgoing orders. It is also crucial to track the actual venue situation, like the trading phase, as well as the available opportunities. Thus, any Smart Order Router requires real-time market data from different venues. The market data can be obtained either by connecting directly to the venue’s feed handlers, or by using market data providers.

3. Routing the orders to one or several venues according to the decision made at step 2 using: