We’ve been chatting with a number of MTFs this week about their dependence on smart order routing technology to attract liquidity to their venues. All SOR systems basically work the same way. First, they scan the ever growing number of venues so as to create a virtual market of what’s out there, and then they decide where and how to break up the flow between those venues. As well as looking for price improvements, some of the more sophisticated SORs also take into account transaction and other settlement costs in deciding which venue to send an order to.

There is undoubtedly an SOR arms race going on and one of the key battlegrounds is how and where to place passive liquidity. In theory, if everyone was running effective smart routers then it wouldn’t matter where you placed a passive order as it would always be found by the SOR of any interested trader. Equally, if you could guarantee getting filled then you would no doubt place orders at the venue that provided the greatest rebates (Nasdaq OMX Europe, anyone?). The trick then is in balancing certainty of execution against total cost of execution. The net effect of this is that much passive liquidity is simply rested on the primary exchanges.

Naturally the new MTFs are keen to make smart routing technology as inclusive of them as possible, although they aren’t the ones who have to pay for it.

Happy to host an event at Fidessa Towers if any of you would like to help shape the next generation of SOR technology – please let me know.

Finally, I hear all is not going smoothly with the traditional “Secret Santa” ritual of gift giving between exchanges and MTFs. Clara was supposed to buy for the boys (Peter and Eli) but is claiming that she can’t find a common symbology set anywhere. Mark is down to buy a gift for Charlotte although I am not sure she plays cricket or baseball. Meanwhile, Artur is refusing to let anyone borrow his consolidated tape to wrap the presents up.