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Smart Order Routing Everything You wanted to know (but were afraid to ask). 28 th October 2009 Steve Grob - director of strategy Fidessa. Agenda. - Do you need a smart router at all? - What are the challenges of SOR - What's in the SOR Box - Implementing SOR successfully
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Smart Order RoutingEverything You wanted to know(but were afraid to ask) 28th October 2009 Steve Grob - director of strategy Fidessa
Agenda - Do you need a smart router at all? - What are the challenges of SOR - What's in the SOR Box - Implementing SOR successfully - SOR Checklist
Spread of Fragmentation • European wide regulation enacted in November 2007 to: • Harmonise the investment services regime in 30 European countries • Improve transparency • Improve client categorisation • Provide “best” execution • Based upon multiple factors not just price • Led to creation of: • Multilateral Trading Facilities (MTFs) • Systematic Internalisers (SIs) • and dark pools
Unintended Consequences • Fragmentation has also increased in: • Market Data • Clearing and Settlement • Transparency Decreases • Different rules for Primaries, MTFs, SI’s and Dark Pools • MiFID Waiver • Cost of execution • Lack of coordination • Market opening times • Tick sizes
But………………. Nevertheless trading of European equities has continued to fragment at an alarming pace.
Which venues are most affected: Source: Fidessa Fragmentation Index Sep 2008 to Sep 2009 www.fragmentation.fidessa.com
The London Experience Fragmentation of FTSE 100 stocks has risen by over 50% in the last year Source: Fidessa Fragmentation Index Sep 2008 to Sep 2009
The London Experience II And FTSE 250 stocks are affected too Source: Fidessa Fragmentation Index Sep 2008 to Sep 2009
France, Germany too Source: Fidessa Fragmentation Index June 2008 to June 2009
Even Switzerland Source: Fidessa Fragmentation Index Sep 2008 to Sep 2009
And the Nordics? Source: Fidessa Fragmentation Index Sep 008 to Sep 2009
Q -So do I need a smart router? • A - Probably • Chi -X, Burgundy, Turquoise • The Nordics is a microcosm for what is happening in Europe • Break down of national boundaries • Sector breakdown • Cross listing http://fragmentation.fidessa.com/stats/index/OMXC20.CO.html
Old Style Order Routing Client CARE flow Trader electronic (FIX) ALGO flow Algo CSX directed DMA flow order
Smart Order Routing Smart Order Router Client Smart CARE flow S O R CSX Trader electronic (FIX) Smart ALGO flow Algo Chi -X Burgundy smart DMA flow Turquoise smart order smart instruction
SOR Challenges • SOR versus Smart Workflow • Fungibility • Must be completely integrated • Monitoring • did my SOR make the right decision? • Proving it to customers and regulators • Venue Connectivity • Highly dynamic • Need plug and play approach • Build versus buy • The risk of using smart brokers
What's in the SOR Box • Market Data • Virtual Market • Consolidated tape • Fungibility • Making a smart decision • Liquidity/Price • Trading fees • Recycling unfilled orders • Reporting - can I prove the SOR made the right choice to • Myself • My customers • My regulator http://fragmentation.fidessa.com/
Implementing an SOR Strategy • Build versus Buy • Or……. use a third party Broker • How does SOR fit with Algo trading • Algos are concerned with when to place an order (VWAP, TWAP, POV) • SOR is focussed on where (CSX, Chi-X, Burgundy, Lit v Dark) • And yes they do ultimately need to talk to each other • Use suppliers that have proven technology • SOR sounds easy but it gets complicated quickly
SOR Checklist • It will be impossible to offer “good enough” execution without an SOR that: • Includes lit and dark capabilities • Provides complete workflow • Tells you what is going on • It will be difficult to offer execution services without adopting a pan Nordic and, ultimately a pan European, outlook • The MiFID genie is out of the bottle – there’s no going back! And you're going to need better information than before www.fragmentation.fidessa.com