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Total Posts: 4
Joined: Mar 2010
Posted: 2019-05-15 14:14
Can anyone point me to some resources to help understand a bit more about how broker algorithms/SOR's decide where to route orders?I guess the answer will be different depending on the objectives of the algo but I would have thought in the main brokers would attempt to cross internally before routing to dark venues and only using lit venues once other liquidity had been exhausted?

I remember reading a blog post about identifying algo's from market data which had a good section about routing logic but I can't seem to find it annoyingly



Total Posts: 23
Joined: Jul 2018
Posted: 2019-06-07 22:22
It really depends on the nature of the product. If it's OTC most brokers will have a dealing desk where they b-book (don't hedge) soft flow. They will also have an aggregated feed of all the LPs they take prices from where they will send toxic flow. On this feed orders are usually allocated based on best price (best on a given side, aggregation allows mms to skew out of one side).

If it's an exchange traded product the brokers could be STP in which case orders are simply forwarded on to the exchange, no interesting logic there. If they offer an execution service then you can consult the nice book by Barry Johnson "Algorithmic Trading and DMA" for a good overview of how such algorithms work with many good links you can follow through for further leads. You won't find papers or books about how brokers allocate in practice because of competetive advantage. Two nice papers I like on this topic are the seminal paper of Almgren and Chriss laying out a basic setup and mean/variance optimization for execution, and Kearns' paper on allocating to dark pools.
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