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Smart Order Routing (SOR) is a technology used in trading to automatically find the most favorable price available across multiple exchanges. It helps execute orders efficiently by splitting them or directing them to venues with the highest available liquidity and lowest costs.
Smart Order Routing (SOR) is an automated system that directs a client’s trade orders to the most optimal trading venue based on pre-defined parameters such as price, speed, and liquidity. It is widely used by brokers and institutional participants to achieve what is often called "best execution" — that is, securing the most favourable combination of price, cost, and speed for an order.
SOR is particularly useful in markets like India where equities are listed across multiple exchanges, primarily the NSE and BSE. It ensures that a buy or sell order is routed to the platform offering the most efficient execution opportunity.
The SOR system continuously scans multiple exchanges in real time. Once a client places an order, the system evaluates:
Price: Looks for the lowest ask price for a buy order or highest bid price for a sell order
Fees: Takes into account transaction charges, brokerage fees, and regulatory levies
Liquidity: Chooses venues with higher trading volumes to avoid slippage
Latency: Assesses network speed and response time for faster order placement
Execution Probability: Prioritises platforms where full order execution is more likely
Once evaluated, the system either routes the full order to a single venue or splits it across platforms like NSE and BSE based on which offers the optimal execution path.
Suppose a trader places a buy order for 1,000 shares of Company X. Here's how SOR might function:
NSE offers 600 shares at ₹500
BSE offers 400 shares at ₹499.90
The SOR algorithm may split the order — executing 400 shares on BSE at a more favorable price, and the remaining 600 on NSE — thus achieving both speed and price optimisation. This is an example of order-splitting based on “best fill” strategy.
Different strategies or routing types are used depending on trading priorities:
Cost-Based Routing: Optimises for lowest total transaction cost including fees
Liquidity-Based Routing: Focuses on venues with high volumes to ensure complete execution
Time-Priority Routing: Routes based on the speed of execution
VWAP/TWAP-Based Routing: Uses algorithms that aim to execute orders around the average market prices (Volume Weighted / Time Weighted Average Price)
Each routing type aligns with a specific trading objective or market condition.
SOR systems are customisable to align with user preferences or institutional mandates. Some of the configurable parameters include:
Preferred Exchange/Venue: Prioritise NSE over BSE or vice versa
Order-Splitting Rules: Define limits for maximum split size or minimum execution quantity
Execution Filters: Restrict routing to venues with specific liquidity or bid-ask spread
Latency Preferences: Apply weightage to platforms with faster execution speed
Fallback Logic: In case of order rejection, route to alternate venue automatically
These configurations ensure that SOR adapts to specific trading goals without requiring manual intervention.
While benefits can vary based on strategy and market conditions, some common advantages include:
Potential for more consistent execution by scanning across multiple platforms
Faster order processing due to automation
May offer access to favourable prices depending on market conditions
Reduced manual errors in routing
Scalability for institutional trading volumes
Could support improved fill rates through automated routing logic
SOR systems help traders remain competitive by making trade execution more data-driven and systematised.
Despite its efficiency, Smart Order Routing faces certain limitations:
Latency Issues: Real-time data syncing may lag during high volumes
Algorithm Errors: Misconfiguration or bugs may lead to suboptimal execution
Order Fragmentation: Splitting orders may increase slippage or brokerage fees
Exchange Limitations: Not all stocks or instruments may be SOR-eligible
Regulatory Restrictions: Compliance frameworks may limit certain routing paths
Traders must review system configurations and monitor execution reports to ensure desired outcomes.
Smart Order Routing has emerged as an essential tool in modern trading environments, enabling more efficient execution across multiple venues. While the technology offers clear advantages in terms of price, speed, and accuracy, it requires careful configuration and understanding of the underlying rules. For both institutional and retail participants, SOR is a technology-driven approach that can support more structured trading execution when used with appropriate oversight.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
A smart order routing algorithm is an automated logic system that determines where to send a trade order based on price, speed, liquidity, and fees across multiple exchanges.
Traders use SOR as a tool to potentially access more efficient execution across different exchanges based on market data to find the most favorable price available across different exchanges, increasing the chances of successful trades.
SOR facilities are typically available to traders using platforms offered by SEBI-registered brokers. Availability may vary based on the broker and the instruments traded.
No, not all stocks are SOR-enabled. Brokers usually maintain a list of stocks that are eligible for smart order routing based on volume, liquidity, and exchange support.
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Posted on 19 Dec
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