Published On: Fri, Oct 1st, 2010

BSE Introduces Smart Order Routing

After receiving necessary approvals and guidelines from Securities & Exchange Board of India (SEBI), Bombay Stock Exchange Ltd has introduced Smart Order Routing (SOR) for its members.

As per the SEBI circular SOR allows Brokers’ trading engines to systematically choose the execution destination based on the factors like price, cost, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.

Highlights:
– SOR makes the intelligent selection of key trading venues even more important in the quest for best execution
– SOR is well-established in all developed markets with multiple exchanges
– Widely used by leading Brokerage firms globally for more than a decade
– Orders can be filled in any number of different ways, mainly because numerous venues are competing to become primary destinations for order flow and that gives traders many different options in terms of the balancing cost, certainty and risk.
– Some key attributes for SOR include : Best Price, Lowest Cost, Probability of Execution

SOR Membership at BSE:
– Members can avail SOR facility by applying to the exchange with the SOR application form along with the completed Vendor Certificate
– This will be followed by a systems audit by a BSE empanelled CISA certified auditor
– Members need to follow guidelines mentioned in the related SEBI and BSE circulars on SOR

Talking about the initiative, Sayee Srinivasan, Head Product Strategy, said, “Since the advent of electronic trading in our equity markets, Indian retail and institutional investors have been proactively pursuing smarter, faster, cheaper and more efficient trading strategies. In most instances, such strategies are automated versions of time-tested strategies from the more manual, floor-based trading era. They now have a new name – algo trading.

The success of any algo strategy is dependent on the manner in which the orders being determined by that specific strategy are routed to one or more execution venues; this ability is generically known as SOR or smart order routing. Smart-ness or intelligence matters, as well as speed, cost and efficiency.

There has been broad consensus that the inability to route orders smartly has been inhibiting the growth of our markets by reducing the effectiveness of algo trading. This is turn has stunted the deployment of our strategies, in turn depriving our markets of an important source of liquidity.

For decades, a key source of liquidity in our floor based trading markets was from investors comparing prices for a stock across different exchanges and sending their orders to the one offering a better fill. With the advent of electronic trading, orders from retail customers are typically processed through computerized systems operated by brokerage firms. SOR will finally allow such systems to route customer orders to the venue offering a better execution. This is a standard feature in markets around the world, popular with both retail and institutional investors.

Its introduction in India by SEBI is an important step in the evolution of our market infrastructure, and should result in a significant improvement in the liquidity, integrity and overall quality of our markets. BSE is excited with this development and will be working closely with firms and their clients to facilitate its roll-out.”

For more details, please refer to the circular:

http://www.bseindia.com/cirbrief/new_notice_detail.asp?noticeid=%7bED650061-3DCD-44EF-9997-E6FBA66E9703%7dnoticeno=20100929-13&dt=9/29/2010&icount=13&totcount=13&flag=0

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