Bringing Intelligent Decision-Making to Order Routing

Abstract

Fragmentation is accelerating the shift of liquidity between venues, creating a need for second-generation smart order routing (SOR) to bring real-time intelligence into the decision-making process. SOR is an essential tool to navigate liquidity, yet the existing generation of static SOR isn’t smart enough and can’t cope. The next generation requires real-time analysis of pre- and post-trade data along with adaptive trading technologies to seek and execute against dynamic liquidity. SOR also needs to incorporate historical execution and venue data to predict where liquidity is going to be. The aggressive business models implemented by competing venues have been the drivers behind “dynamic” liquidity. Finding the cheapest venue is no longer the primary issue, as the costs of a poorly executed trade can easily outweigh any fee cuts or rebates. As static SOR can’t cope with these dynamic shifts, firms need to enhance their ability to build a liquidity profile and execute in real time. The second age of SOR is here. In order to seek and capture dynamic liquidity, firms need to bring adaptive, real-time SOR capabilities into the execution process.

TOPICS: Big data/machine learning, factor-based models, analysis of individual factors/risk premia