Electronic trading and order routing systems
Smart order routing SOR is an automated process of handling orders, aimed at taking the best available opportunity throughout a range of different trading venues. The increasing number of various trading venues and MTFs leads to a electronic trading and order routing systems in liquidity fragmentation, when the same stock is traded on several different venues, so the price and the amount of stock can vary between them. SOR serves to tackle electronic trading and order routing systems fragmentation, or even electronic trading and order routing systems from it.
Smart Order Routing is performed by Smart Order Routers - systems designed to analyze the state of venues and to place orders the best available way, relying on the defined rules, configurations and algorithms. The forebears of today's smart order routers appeared in the late s: Later the SOR systems were enhanced to cope with High Frequency Tradingto decrease latency and implement smarter algorithms, as well as work with dark pools liquidity.
Here are some US statistics from Smart order routing may be formulated in terms of an optimization problem which achieves a tradeoff between speed and cost of execution. SOR provides the following benefits: There are, however, some disadvantages: Venue parameters, such as average latency, commission, and rank can be used to prioritize certain venues. Custom algorithms, like synthetic orders peg, iceberg, spraying, TWAPcan 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. Routing here does not just imply static routing to a certain venue, but dynamic behavior with updates of existing orders, creation of new ones, sweeping to catch a newly appeared opportunity. The classic definition of Smart Order Routing is choosing the best prices and order distribution to capture liquidity.
In some cases, algorithmic trading is rather dedicated to automatic usage of synthetic behavior. Based on mathematical models and considering historical and real-time market data, algorithms determine ex ante, or continuously, the optimum size of the next slice and its time of submission to the market.
A variety of principles is used for these algorithms, it is aimed at reaching or beating an implicit or explicit benchmark: 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. More generally, smart order routing algorithms focus on optimizing a tradeoff between execution cost and execution time. There are currently few companies, officially defined as providers of testing and quality assurance of the SOR systems:.
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