Smart order router definition

What is a smart order router?

A smart order router (SOR) is an automated process used in online trading, which follows a set of rules that look for and assess trading liquidity. The goal of an SOR is to find the best way of executing a trade, taking advantage of opportunities across a range of trading venues through advanced algorithms.

SORs were first used as a key technology in the equities market, but they are now an integral part of most trading platforms across all asset classes. SORs became a necessity as electronic trading grew in popularity, and even became a regulatory requirement to ensure that all banks and brokers were giving clarity on how their products work.

The increased number of trading venues has caused fragmentation of liquidity, as assets are traded across a number of venues at different prices and in different amounts. Smart order routers serve to tackle this fragmentation by analysing the different offers and placing orders based on the best available option.

Pros and cons of a smart order routers

Pros of smart order routers

Most major institutional investors and brokers will use a smart order router to automatically find the best possible prices for trades as quickly as possible. Each smart order router will be set up according to the different needs of the order, as well as the conditions specified by institutions and regulatory bodies.

IG uses smart order routing (SOR) technology to search for liquidity across multiple venues, starting with 'dark pools' that offer mid-point matching – meaning you get the best possible chance of price improvements.

SORs mean that trading platforms adhere to the best execution requirements by considering cost, performance and the optimal way to achieve results.

Cons of smart order routers

As the number of trading venues grows, we are likely to see continued development of SORs as the technology behind them becomes outdated.

Luckily, the idea behind SORs is to help manage uncertainty and market complexity by building on what we already know about markets. This means that even as the market becomes more complex, the SOR system will become even smarter and faster.