A couple of announcements have caught my eye over the past few days. This week saw the launch of a smart routing service called CYCLE from BATS Europe and, last week, I was at a seminar in Stockholm where Turquoise’s Adrian Farnham presented its own liquidity aggregation service – TQ Lens. Both of these announcements highlight how venues are starting to overlap with other players in their continual quest for order flow. The rationale is simple – by offering to onward route any order that doesn’t match on their own platform, these operators hope to encourage more people to use their service in the first place. It’s a tricky game though and potentially takes them into the space occupied by the broker community, i.e. finding the optimum destination for their customers’ orders. Of course, the brokers are offering matching platforms too – in the form of their own dark pools – that aim to provide more effective executions for some types of order flow. The net result is confusion over whether you are using any such service as a destination, as a smart route to other destinations, or both.

This raises some interesting technical challenges as any particular order may run through a number of potentially different pieces of smart routing kit before it reaches its final destination. It’s not obvious how the “smart” decisions made at the beginning of the order’s lifecycle will persist through these other systems (especially if they’re from different suppliers). This is different from the situation in the USA where Reg NMS forces venues to onward route any order that it cannot match at the NBBO (National Best Bid and Offer) and so there is an agreed standard for how venues operate in this space.

Whether you are a broker or a venue the objective is the same – to move ahead of your competitors in the queue for order flow. In the absence of any defined rules as to how to play the game it’s not surprising that both brokers and venues are looking to jump the queue any way they can.