Order Routing: Analyzing the Optimization Problem with the “Rule of Three”

In the comprehension of any message or story, the “rule of three” is crucial. It states that a trio of segments, events or characters is most effective in the construction, communication, and cognition of any overarching concept. As such, we also leverage the “rule of three” to draw insight on the complex optimisation problem when routing orders between venues to achieve best execution. 

In defining this optimization problem, we acknowledge three key factors that impact order routing. These three factors represent the beginning, the middle, and the end of the order routing lifecycle:

1. orderbook state (beginning)
2. likelihood of execution (middle)
3. execution performance (end)

When applying the “rule of three” framework, we derive some interesting insights across all three of the aforementioned factors. They provide a better picture of the pros and cons of prioritising one venue over another when posting liquidity.

Such insights include; the “realized” distribution of European Best Bid and Offer price level executions across venues, the significant difference in aggressive order arrival dynamics between venues, and how difference in perspective can influence perception of execution performance.

Taking these all together, we can see that venues that rank highly across all three key factors will be integral to successful order routing strategies. Read all about it in our latest Trading InfoSnack.

The Trading InfoSnack articles are insightful research features that provide commentary on market relevant trends, models and microstructure that influence the trading of Swiss securities, underpinned by in-depth analysis from the Equities team of SIX.

To trading and market structure professionals with a focus on the EMEA region the previous Trading InfoSnacks are also of interest: Stale Prices and the Price of Being Stale, This Time is Different, Cryptophoria, Last Orders, Size Matters, Liquidity under the Volatility Microscope, Closing Auctions: What’s Hanging in the Balance?, Back to the Future(s) and What’s in a Liquidity Smile?