Smart order routing takes off on bourses

Smart order routing (SOR) has finally taken off in India, with the country's two premier bourses resolving their long-standing dispute over the audit trail of orders.

SOR allows brokers' trading engines to automatically choose the best price for stocks from multiple exchanges.

Several brokers have recently received approval from the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) to launch SOR technology to execute trades.

"We have received 10 applications so far, of which five have already been approved. The remaining applications are being processed," said an NSE spokesperson.

In the case of BSE, its spokesperson said, "A total of 12 applications have been received by BSE, out of which eight have been given approval and the remaining 4 are getting their systems ready for audit. According to our records, one broker has started using SOR-based trading."

Credit Suisse last month became the first broker to execute trades using SOR technology on both the BSE and NSE.

Since December 27, BSE has started time stamping its broadcast messages, detailing the date and time of an order. This, brokers say, has allayed NSE's earlier concerns over the audit trail of orders.

The Securities & Exchange Board of India (Sebi), which permitted SOR in Indian securities on August 27, had mandated stock exchanges to put in place a system to time stamp their market data feed within three months from implementation, if it was not already available.

Another issue that bothered market participants was an NSE circular that all SOR orders must be only of the "immediate or cancel" order type.

However, Sebi on December 9 clarified that stock exchanges can permit SOR for all types of orders.

Experts believe that SOR has potential to change the dynamics of the Indian market. "Smart order routing would allow people to tap liquidity wherever it exists," said Jayanth Varma, professor of finance at Indian Institute of Management-Ahmedabad and a former Sebi executive director.

"It will help those who are putting in large orders, as they will be able to monitor the order book of multiple exchanges automatically and execute the trade at the best price," he added.

"Gradually, more and more people will start using smart order routing as they become comfortable with it. It will have an impact on market dynamics when big traders and arbitrageurs start using it," Varma said.

The cost of implementing an SOR system is not very high, according to vendors. The hardware cost is about Rs 3-4 lakh, while the software cost comes to Rs 8,000–10,000 for a terminal each month.