Trade Routing in Focus

Terry Flanagan

In the increasingly complex and fragmented U.S. equities market, sell-side banks can differentiate themselves by most effectively routing the orders of their buy-side customers.

Smart order routers are a key cog in the infrastructure of secondary-market trading, but just having the right order router doesn’t assure optimal routing.

“There’s no silver bullet,” said Will Winzor-Saile, electronic execution product specialist at Fidessa. “There needs to be an understanding of not just the market, but also what you as a bank are trying to achieve, how your systems fit together, how they work, and where they’re located. It’s only by working very closely with the business and the market that you can build the best strategy for your particular bank.”

Smart order routers emerged in the 2000s when regulatory changes and advances in technology enabled new trading venues to compete with the incumbent New York Stock Exchange and Nasdaq. SORs are ubiquitous on today’s Wall Street trading desks, but while routers are necessary, the garden-variety model has become largely commoditized.

“They may be called smart order routers, but there’s generally not that much intelligence behind them,” Winzor-Saile told Markets Media. “They look at a list of markets. They look at where is the best price and the cheapest place to trade, and they send the order. There’s no actual smarts behind it.”

Will Winzor-Saile, Fidessa

Will Winzor-Saile, Fidessa

Such technology has become dated to a certain extent given the complexities of present-day market structure, as manifested by factors such as high-frequency trading, the proliferation of order types and latency arbitrage. Cutting-edge routers need to cut through the smoke to find the best liquidity.

“Even some of the most advanced order routers still very much rely on the lit data they see,” Winzor-Saile said. “But what you see in the market itself is not reliable anymore. What you actually see isn’t always there, it isn’t always hittable.”

“The way smart orders need to work nowadays, is to take a much more predictive approach,” he continued. “To say yes, right now I can see this volume, but my experience tells me that in actual fact, there is going to be less available, or more available. Knowing this, you can get the best possible execution.”

Order-routing technology is evolving to the extent that the sub-optimal and fairly basic routers still being used by some banks and brokers will need to be upgraded, or business will be lost.

“There is a huge focus on best execution,” Winzor-Saile said. “If a buy side has a choice between two brokers, one of which consistently gets them better performance because they’ve got a more intelligent SOR and they’re not missing that hidden liquidity, people are going to trade with them.”

Featured image by Steve Johnson/Dollar Photo Club

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