Does Smart Routing Matter?

Abstract

The authors compare the performance of broker smart routers for non-marketable and marketable orders. For non-marketable orders, smart routers that “naively” route to maximize liquidity rebates perform significantly worse than those routing to maximize fill rates. The difference between the best and worst broker smart router is about 10% of the bid–ask spread (0.4 basis points), on average, for large-cap stocks and 6% of the spread (0.9 basis points), on average, for small-cap stocks,which is a significant difference for cost-sensitive traders. The authors also find that the best brokers perform well across all liquidity groups. For marketable orders, however, smart router performance generally does not vary significantly across brokers.