Definition
Smart Order Routing (SOR)
Smart Order Routing is technology that automatically scans multiple trading venues and routes each order, or parts of it, to the venue offering the best available price and liquidity at that instant.
In India, where the same stock trades on both NSE and BSE, SEBI mandated that brokers offering SOR ensure best execution across exchanges. An SOR engine compares the live order books, accounts for impact cost and fees, and may split an order to capture liquidity on whichever venue is cheaper.
SOR sits on top of Direct Market Access and must comply with exchange rules and the broker's risk controls. Because Indian equity markets are concentrated on the NSE, SOR's benefit is smaller than in fragmented markets like the US, but it still matters for large orders and for instruments where BSE liquidity is meaningful.
Related terms
- Direct Market Access (DMA)Direct Market Access lets institutional clients route orders straight to the exchange order book using a broker's infrastructure and exchange membership, without manual broker intervention on each order.
- Execution AlgorithmAn execution algorithm is a program that works a large parent order into many smaller child orders over time to minimise market impact and achieve a target benchmark such as VWAP or the arrival price.
- Impact CostImpact cost is the percentage cost of executing a specified order size relative to the ideal mid-price, and is the liquidity measure the NSE uses to assess stocks for index inclusion.
- Best ExecutionBest execution is the obligation on a broker or fund to take all reasonable steps to obtain the most favourable terms for a client's order, considering price, cost, speed, likelihood of execution and settlement.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.