Smart Order Router

Smart order routing (SOR) is technology that automatically analyzes quotes across multiple trading venues and routes your order to achieve best execution - the best price, fastest fill, or lowest cost.

Market fragmentation created competition among exchanges and alternative venues. Each venue may have different prices, liquidity, speeds, and fees, creating opportunities for better execution.

A dark pool is a private trading venue where orders are not displayed publicly. They often execute at the midpoint of the bid-ask spread, providing price improvement for larger orders.

NBBO (National Best Bid and Offer) is the best available bid and ask price across all exchanges. Your order should execute at NBBO or better. Its the benchmark for execution quality.

Different venues charge different fees or pay rebates. A venue with a slightly worse displayed price might actually be cheaper after accounting for fees. Smart routing considers total cost.

Toxicity measures how prices move against you after filling at a venue. High toxicity means youre trading against informed flow - prices consistently move adversely after your fills.

Large orders are divided into smaller child orders routed to multiple venues. This accesses more liquidity, reduces market impact, and can achieve better overall execution.

Dark-first tries dark pools before lit markets. If you get filled in a dark pool, often at midpoint, you save half the spread. If not filled, the order then routes to lit venues.

Faster routing means your order arrives before prices change. Lower latency gives better queue position on limit orders and reduces adverse selection on market orders.

Venues pay rebates to orders that add liquidity (makers) and charge fees to orders that remove liquidity (takers). This creates incentives that affect routing decisions.

Score venues on multiple weighted factors: net price (including fees), available size, latency, historical fill rate, and toxicity. Route to highest-scored venues with appropriate splitting.

Adaptive routing learns from execution results. It tracks fill rates, toxicity, and price improvement by venue and adjusts routing decisions over time to improve execution quality.

Regulations require seeking best terms for clients. This includes written execution policy, venue analysis, ongoing monitoring, documentation, and periodic reporting (Rule 606 in US).

Use low-level languages (C++), minimize memory allocations, use kernel bypass networking, co-locate at exchanges, optimize critical paths, and continuously profile for improvement.

Track fill rate, price improvement vs NBBO, effective spread, latency distribution, toxicity by venue, fee costs, and compare against benchmarks like VWAP for larger orders.