Abstract

In the past decade traditional market structures have been drastically revolutionized, creating new potential for electronic trading. The driving forces are changes in trading behavior, advances in technology and new regulation. Traditional exchanges are challenged by new electronic trading platforms competing on the basis of price, cost, speed and efficiency. As trading has become more fragmented occurring in multiple venues the complexity for intelligent order routing decisions (smart order routing) will increase and extend the demand for sophisticated trading tools and efficient technology. Market fragmentation and dispersion of liquidity impose new challenges for investment firms to achieve best execution for their client orders. Against this background we examine two order execution strategies where one approach applies a pre-defined rule framework (static best execution); the alternative considers smart order routing decisions using real-time market data (dynamic best execution). We elaborate the benefits of smart order routing and outline our research approach for the validation of these findings.

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