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Combining Algorithmic Trading with SOR

Published in Automated Trader Magazine Issue 15 Q4 2009

Smart Order Routing (SOR) has been the buzz phrase in European equity trading over the last 18 months. Deregulation of trading venues allowed Multilateral Trading Facilities (MTFs) to trade stocks listed on other exchanges. Consequently trading service providers started offering SOR products to allow clients to trade the same stock on MTFs as well as the original exchanges where stocks are listed (the primary exchanges). However, SORs are limited in how much trading fee reduction and price improvement they can obtain. Dr Usman Malik, partner of algorithmic trading specialists PE Lynch, outlines how combining SOR with algorithmic trading strategies offers a method to overcome the limitations of standalone SOR.

MTFs

MTFs allow a trader to use more than one venue to trade the same stock. There are two major benefits to trading on MTFs:

1.Trading Fee Reduction

The new MTFs are charging a much smaller trading fee compared to the primary venues and in many cases offer a maker taker model to establish the transaction fee. The maker taker model is one where the person offering liquidity to the orderbook (a passive order) gets a rebate paid by the person taking liquidity from the o

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