OrderRouting

Order routing is the process by which an order to buy or sell a financial instrument is transmitted from a client’s trading system to one or more trading venues for execution. The objective is to obtain the best possible terms, considering price, speed, and the probability of an execution, while complying with regulatory and internal policies.

A typical order-routing setup includes an order management system, an order routing engine, and connections to multiple venues such as stock and futures exchanges, alternative trading systems, and dark pools. When an order arrives, the routing engine applies defined rules and current market data to decide where to send portions of the order. Routing may involve direct routing to specific venues, sponsored access, or smart order routing that subdivides an order across venues to maximize overall execution quality.

Routing decisions are driven by execution quality objectives that balance price improvement, fill probability, and benchmark considerations (for example VWAP or time-based goals). Algorithms used in practice can be price/time priority, liquidity-seeking, or hybrid approaches, and they account for latency, venue fees, minimum tick sizes, and order-size constraints.

Regulatory and risk considerations shape order routing. Firms have a duty of best execution, requiring policies and controls to optimize execution quality while managing market impact, compliance with reporting requirements, and restrictions on order handling.

In fragmented markets, effective order routing is essential to access multiple venues and aggregate liquidity. Ongoing developments include enhanced data analytics, streamlined connectivity, and advanced smart order routing that adapts to evolving market conditions.