Order Routing

[Soes Bandit]

Hi Guys,

I hope everyone is well.

I am having a little difficulty in understanding something about order routing.. due to the fact that the author of the book I’m reading contradicts himself on a few occasions.

If I send a marketable order (either a market or limit order) direct to the market using a DAB, i.e. to the NYSE. Are these order all filled in house? I suspect they are, hence why exchanges, ECNs and so on fight with each other for more liquidity. It wouldn’t make sense for them to receive an order and then try to look elsewhere to fill it.

I know that ARCA promises to honour your full order even if the full amount of shares are not available by buying from other exchanges. But in general, am I right in believing that orders are filled in house only?

Many thanks!

 

[JackRab]

Hi Guys,

I hope everyone is well.

I am having a little difficulty in understanding something about order routing.. due to the fact that the author of the book I’m reading contradicts himself on a few occasions.

If I send a marketable order (either a market or limit order) direct to the market using a DAB, i.e. to the NYSE. Are these order all filled in house? I suspect they are, hence why exchanges, ECNs and so on fight with each other for more liquidity. It wouldn’t make sense for them to receive an order and then try to look elsewhere to fill it.

I know that ARCA promises to honour your full order even if the full amount of shares are not available by buying from other exchanges. But in general, am I right in believing that orders are filled in house only?

Many thanks!

In Europe there is MIFID which is a directive to order handling etc. One of the key points is:

-Best execution-
MiFID will require that firms take all reasonable steps to obtain the best possible result in the execution of an order for a client. The best possible result is not limited to execution price but also includes cost, speed, likelihood of execution and likelihood of settlement and any other factors deemed relevant.

USA will something similar, but I don't know the details.

This basically means they need to execute the order at the best price in the quickest time. Whether in-house or through exchange that shouldn't matter. If you trade with a broker that has a market maker arm, they would likely route most orders to their MM's, because that gives them a profit(spread) and less costs.

But to say all goes in-house... no.

Exchanges fight for market share because that's how they make money.. Generally, more liquidity means more market share, more fees for them.

If a broker owns their own exchange, a limit order that would sit outside the bid/ask would likely stay on their own exchange until traded/arbitraged, unless the client specifies where it should be routed to.