Understanding the nuances of smart order routing

Normally, most traders have their preferred stock exchanges where they would like to place equity buying and selling orders. Generally, people go to NSE for greater liquidity on large cap stocks. But, small and mid cap stocks are traded more actively on the BSE and that is the exchange that traders prefer. But what if a stock is traded on both the exchanges? In your obsession to rely on your preferred exchange, you may be missing out on better price opportunities in the other exchange. But hold on; is it not too cumbersome to keep checking both the exchanges to find the better price? Well, you need not do it manually as there is the facility of smart order routing (SOR) that can scan both the exchanges and get you the best price.

Now, back to basics; what do we really understand by smart order routing (SOR)? Exactly, how does smart order routing work in practice? More importantly, what are the popular smart order routing techniques? In practice, SOR is quite simple and your broker can help you to execute SOR orders by just logging into your trading system and expressing your interest for the SOR facility. Remember, SOR is not restricted only for online orders. You can opt for SOR even if you are placing orders online or if you are using the Call N Trade facility that most brokers offer!

What is SOR and how does SOR operate?
The Smart Order Routing (SOR) facility scans the market for the best price and liquidity across the NSE and the BSE and executes accordingly. Effectively, SOR gets you the best possible price across both the exchanges without any manual effort from your side. Remember, SOR can be used to initiate a trade and this trade can either be a trade on the long side or the short side. You can use SOR for executing intraday trades or even delivery trades. Additionally, you can place SOR orders as normal orders or limit orders, although many brokers encourage you to only place SOR orders in the Normal mode and not as limit orders. So, how does SOR work practically?
 

SBI – Depth available on NSESBI – Depth available on BSEQuantityRateQuantityRate150251100251.50150252120252.25100253150253.7520025480254.25    

 
If Trader (X) places an order to buy 800 shares of SBI via SOR, here is how it will get executed in the above case..

Executed PriceExecuted QuantityWhich Exchange251.00150NSE251.50100BSE252.00150NSE252.25120BSE253.00100NSE253.75150BSE254.0030NSE254.25-BSE

The above table captures how the SOR will be executed across both the exchanges based on the best prices and quantity available. This is a theoretical representation and in reality the depth is very dynamic. That makes the actual process of SOR execution quite complicated.

How do you close out your SOR orders in case of intraday trades?
If you have purchased shares of SBI for delivery in the above case or you have sold your shares in the demat account using SOR, then there is not much of a problem. The SOR will be executed based on funds availability and if funds are insufficient then SOR orders will not be executed. In case of SOR sales the delivery instruction slip (DIS) has to be given and there is not much else to worry about. The real complication arises when these orders are intraday orders. Let us understand why?

Let us go back to the above case of SBI order placed via SOR. Out of the total order for 800 shares of SBI, 430 shares were executed on the NSE and 370 shares were executed on the BSE. When it comes to SOR orders placements ensure that your orders are fully executed by check your order book and trade book and getting a confirmation on the same. This is important because at times your entire order will not be executed in SOR if the volumes are not sufficient. In the above case the SOR has executed 430 shares on the NSE and 370 shares on the BSE. While closing your intraday trades executed in SOR, you need to manually sell 430 shares on the NSE and sell 370 shares on the BSE. This is something you need to be careful about.

General restrictions on SOR orders
Broadly there are some restrictions that are placed on SOR orders by brokers. For example, while some brokers will allow you to place normal orders and limit orders on the SOR platform, many brokers will only allow you to execute normal orders on the SOR platform. Most brokers will permit SOR only in highly liquid stocks where there are meaningful volumes in both the exchanges. Only then SOR makes sense. You cannot use SOR for placing off-market orders since SOR is about getting the best price in a live market. Hence you can use SOR platform only when the live market is on.

Remember, SOR is an added facility for traders and investors to help them use the power of technology to get the best price. You can opt for SOR facility and still stick to your preferred exchange. The choice is entirely yours!