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Smart Routing: The Sat Nav of the Trading World

A couple of people have pointed out to me that the dial seems to be really moving now in terms of fragmentation across the Nordic region. A quick look shows that Stockholm’s share of the benchmark S30 index has now fallen to around 72% and that the FFI for the same index has shot up by 15% just since the beginning of the year. We’re also seeing a similar situation in Copenhagen where fragmentation has grown 20% since January as well. Seems like there are two forces at work here. First, as more trading firms implement smart routing technology then more liquidity leaves the primaries and is traded on the cheaper alternative platforms. This then creates a kind of ‘perfect storm’ whereby the liquidity grows on these platforms making them even more relevant in terms of becoming destinations for best execution. The second is education. More and more buy-side firms – both retail and institutional – are asking their brokers “the MiFID question” in terms of revealing the different venues their brokers considered when executing an order. And, brokers themselves are reaping the commercial benefits through offering more sophisticated smarter venue access.

Much like Sat Nav, smart routing seems to have evolved from a high cost, high tech gadget (that you show off to your friends) to a standard feature found on most quality order management systems. It also comes in a number of different flavours to suit different trading needs and budgets. Both pieces of technology have transformed the way people operate. For someone like me, who regularly ferries his kids to different sporting events at the weekends, Sat Nav has been a godsend. No more getting lost or having to remember badly written instructions – just type in the objective and let the technology do the work! The same is true for smart routing, especially as it allows traders to simply enter a trading objective and then let the computer work out the best route.

Judging by our last readers’ survey, it appears the fragmentation community likes the concept of auctions with around 60% coming out in favour. This was despite Olof’s comment on my last posting that highlighted just how important they are for the primary venues. Either way, the concept of auctions is a guaranteed way to funnel liquidity towards a particular venue as SOR technology will always direct flow to an auction if it’s available. It’s a bit like programming your Sat Nav system to follow only motorways and ignore alternative routes. On this point, maybe the alternative venues should get together and see if they now have enough collective liquidity to create their own alternative auction.

Anyways, I think I’ll ask the boys at Fidessa Labs about building me an SOR app for my iPhone.

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