Modern trading venues are highly fragmented. In the U.S. alone there are over a dozen exchanges and about forty alternative trading systems (ATS) where investors may choose to trade. As a result, the available liquidity on any one exchange represents a small portion of the aggregate liquidity for an instrument.

Market participants interact within today's high-frequency, fragmented marketplace with the use of algorithms such as liquidity aggregation and smart order routing.

These algorithms differ across participants and types of trading strategies. At a high level, they dynamically optimize where, how often, and at what price to trade. These algorithms seek to optimize their own best execution objectives while taking into account short term differences or opportunities across the various venues.

Practice Question 1

The idea of smart order routing is to scan the markets and find the best place to execute a customer's order, based on ______.

I. price
II. liquidity

Correct Answer: I and II

The definition of smart order routing is choosing the best prices and order distribution on multiple markets to capture liquidity.

Practice Question 2

Liquidity aggregation can be used when the market is ______.

A. fragmented
B. concentrated
C. aggregated

Correct Answer: A

Market fragmentation creates the potential for price and liquidity disparities across venues. Algorithms can adapt to market fragmentation by incorporating liquidity aggregation and intelligent smart order routing capabilities.

Practice Question 3

The smart order routing can be used when ______

A. the pricing analytics and fundamentals are moving slowly.
B. the market is fragmented.
C. there are surprising, unexpected news.

Correct Answer: B

Smart order routing (SOR) is an automated process of handling orders, aimed at taking the best available opportunity throughout a range of different venues.