Smart Order Routing (SOR) is a trading technology that automatically routes orders to the most suitable market or exchange to obtain the best price and execution for a given trade.
SOR systems use real-time market data to route orders based on price, volume, liquidity, and fees. Having access to multiple markets at the same time allows traders to optimize their trading strategies and reduce trading costs.
SOR is widely used in electronic trading systems for equities, options, futures, and foreign exchange (FX) transactions. SOR is used in cryptocurrency in the form of DEX aggregators.
Smart order routing on trade markets assisted stock traders in determining the most profitable path for order execution. This strategy can also be very useful in the cryptocurrency market.
The primary issues that cryptocurrency traders face are fragmented liquidity, a lack of trading liquidity for large orders, and inconsistent prices.
SOR solves all of these issues by determining the best route for executing orders in real time using fully automated processes.
In stock trading, the term “route” refers to the path an order takes to be executed. The simplest example of a route implies the following.
Suppose a trader places an order on a stock exchange. A broker accepts this order and forwards it to a market maker to agree on a price.
To help the customer get the best deal, the broker may send the request to multiple market makers at once. This will assist him in determining which company offers the best deal.
Market makers, in turn, aggregate liquidity across multiple markets. Typically, they work with exchanges such as NASDAQ, NYSE, and AMEX.
However, there is a problem.
There are numerous markets and market makers, and a single broker cannot possibly cover them all in order to find the best deal. As a result, users are limited to the options provided by brokers.
This is where smart order routing can help. It automatically scans all offers using predefined algorithms and rules to find smart routes that result in the best deal.
The cryptocurrency market has many similarities with Trading systems. It certainly has some advantages and bonuses that make it superior. However, the fundamental principles remain the same.
As a result, smart order routing can help to optimize the execution of trading orders in a similar way. A typical step-by-step scenario for those who use this method is as follows:
- A trader places an order specifying his desired asset and the price he is willing to pay.
- After receiving the order, the SOR algorithm begins analyzing market data in real time. It collects information from various exchanges and liquidity pools.
- SOR determines the best execution route to help the trader get the best deal. Depending on the liquidity available from various sources, the order may be divided into several parts and executed across multiple trading venues.
- The system completes the order and updates its status. Thus, traders can use a fully automated process to find the best deal.
They scan a large number of decentralized exchanges to help traders find the best price for their orders at any given time.
In comparison to traditional stock markets, blockchain has numerous advantages.
Cryptocurrency traders now have the ability to execute orders quickly and efficiently 24 hours a day, seven days a week. At the same time, transaction costs have dropped significantly, and blockchain offers its users unprecedented transparency.
However, the new technology is not without its drawbacks. At this point, cryptocurrency traders face the following key issues:
Fragmented liquidity.
Each year, the number of crypto assets available for trading increases. The number of centralized and decentralized trading platforms continues to grow.
With such a wide range of options, crypto liquidity fragments, complicating the process for participants.
A lack of liquidity for large orders.
Traders looking to convert large sums of cryptocurrency may also encounter liquidity issues. In fact, it is nearly impossible to find a platform that offers the best value for that.
As a result, traders must do a lot of manual work to convert crypto in small amounts while purchasing the entire order book.
Meanwhile, the rate worsens with each closed transaction, and traders eventually lose money.
Inconsistent pricing.
Cryptocurrency prices are constantly changing. Because of market inconsistency, they may also differ across platforms at any given time.
Even if a trader has verified accounts on a few dozen platforms, there is no guarantee of the best price. Worse, the price may change while the order is being executed.
Smart order routing can be extremely beneficial to cryptocurrency traders because it can solve all of these issues.
Here are some of the major benefits of this technology:
Best pricing execution. Smart order routing helps traders get the best price by allocating the path across multiple exchanges.
Full automation. SOR automatically compares prices across multiple platforms in real time. It eliminates routine work and allows traders to place buy and sell orders more efficiently.
Faster trades. SOR can help traders save time on routine tasks by fully automating them.
Solution for liquidity separation. Smart order routing allows you to allocate liquidity for large deals across multiple platforms. Large investors in the trade market frequently rely on so-called “dark pools” to maintain their anonymity and avoid a sharp increase in stock prices. SOR represents an alternative solution to this problem.
Arbitrage opportunities. Furthermore, this technology can help to capitalize on market inefficiencies and profit from arbitrage trading.
Thus, smart order routing in crypto is the best solution for those looking for the best deal when exchanging cryptocurrencies.
In the early days of cryptocurrency, traders were forced to deal with centralized exchanges because no other option existed.
The first decentralized exchanges, such as 0x and Loop ring, provided them with the necessary level of security. They enabled their users to trade peer-to-peer using their protective wallets.
However, because they relied on traditional order books, order-based DEXs were never able to provide adequate liquidity.
Liquidity pools, which emerged a few years later, solved the problem. Some of the first DEXs to use this solution included Uniswap, Balancer, and PancakeSwap.
However, as their number and popularity grew over time, users encountered the same fragmentation problem.
Smart order routing can solve this problem and take the entire enterprise to a new level.
Smart order routing and algorithmic trading are two different trading strategies. While both strategies seek to maximize trading efficiency, they operate in distinct ways.
Smart order routing focuses on determining the best execution venue for a specific order, whereas algorithmic trading uses algorithms to automate trading decisions based on predefined criteria.
Smart order routing focuses on order routing and execution, whereas algorithmic trading focuses on analyzing market data and making trading decisions based on it.
Both strategies have advantages and can be combined to create a more complete trading strategy.
