Smart order routing made simple

Justin ShortSmart order routing has grown in use and sophistication much like its counterpart, algorithmic trading. Indeed there is now a middle ground of products that use features from both toolsets. The good news is that your broker has almost undoubtedly done all the hard work for you - the most work you’ll ever need to do is to simply sign on the dotted line, writes Justin Short, director, Pacific Rim electronic trading at Merrill Lynch.

Liquidity in Asia tends to be concentrated on single exchanges - Sony is traded on the Tokyo Stock Exchange (TSE), Nintendo on the Osaka exchange (OSE) and BHP on the Australian exchange (ASX).

This is no longer the case in the US and other global markets, where regulatory change has enforced competition between exchanges (even between clearing systems). Competition has benefited participants, leading to a reduction in effective spreads and trading costs.

When an order has a reasonable chance of a fill at more than one location (when the instrument is dual listed) there is an opportunity to search for a better price. Smart order routing instantly performs that search for you, sending your order to the best place possible at that time. Fortunately, because the process is fully automated, it is just as simple to use as before when there was a monopoly on liquidity.

This instant search capability is a prerequisite for Reg NMS and MiFID compliance. What started as an opportunity to get a better price has now become a client protecting requirement.


The first iterations of onward routing technology simply located the lowest offer or highest bid and sent all or part of the order to the requisite venue. Over the past five years, however, the routing logic has evolved rapidly and now delivers a higher chance of securing a better price.

Merrill Lynch’s smart router, SORT, uses a number of techniques to achieve best execution. For example, it stores real-time feedback on individual stocks at each venue, so that orders that are not getting filled can be onward routed instantly to a venue with a better chance of a fill. SORT also allows us to route away from exchanges undergoing technical difficulties and ensure higher overall uptime.

And into Asia...; 

In Asia, the dual listing of stocks occurs only in Japan (TSE/OSE) and India (NSE/BSE). So if you want to trade algorithms in India, that’s fine, but what’s the point of rolling out SORT to, say, Australia?

Firstly, the SORT platform contains a number of other capabilities - notably ‘smart DMA’, with Peg, Iceberg and other such tactics designed to facilitate easier and more accurate trading on all markets.

Secondly, despite the absence of a regulatory imperative, alternative trading venues are emerging in Asia to challenge the incumbent national exchanges. In Japan, for example, there are already two active proprietary trading systems functioning as alternatives to the primary exchanges. More are being built, and in Australia three such systems are being readied for production. As the benefits to investors and market participants become evident, we expect that other locations in the region will follow suit.


While SORT technology has a proven track record in other global markets, to be successful in Asia it must be adapted for local markets. At Merrill Lynch, an important design goal was to ensure that the liquidity search algorithm understands the local environment. SORT’s new venue allocation scheme already handles the very large latencies found at some of the incumbent Asian exchanges. The system also understands that, when trading the long queue stocks so characteristic of the region, it should only move orders to different venues when it is confident of getting a better price more quickly.

Dark pools 

In the US and Europe there has been a proliferation of broker internal liquidity pools to help improve internalisation rates and find better prices for clients. In fact, the development of real-time order routers helped facilitate the development of these internal pools - recognising that in searching for the best price between venues, one of those venues is internal.

Dark pools are an integral part of a service provider’s offering, since liquidity will sometimes be available in the dark pool that is not available elsewhere. Indeed, given that internal liquidity might be available at a more attractive price, we are obliged under the terms of our best execution policy to check there first!

In Asia, Merrill Lynch’s internal crossing system, MLXN, is available to clients trading in Japan and Hong Kong. MLXN gives participants the opportunity to benefit from quicker fills and better prices for no additional effort. Merrill is working with regulators across the region to provide this service wherever possible.


Many brokers have built order routing systems for the US and European markets and most also offer access to internalisation systems. The first challengers to the exchange monopoly in Asia are now starting to emerge. To make the most of the changes that lie ahead, your broker should offer global electronic access with smart routing to existing exchanges and dark pools, as well as to new venues, as they come online. However clients should not need to do any more than sign on the dotted line.
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