Order Routing and Smart Order Routing

When you click buy on a stock, your order does not go to "the stock market" as one place. In the United States, a stock can trade on more than a dozen exchanges and dozens of alternative venues. Order routing is the process of deciding where your order goes. The choice affects the price you get, how fast you get filled and sometimes how much your broker earns from your trade.

Why routing exists#

Modern markets are fragmented. The same stock trades on many exchanges, electronic communication networks (ECNs), dark pools and with wholesale market makers. Prices across these venues are linked, and US rules require trades to happen at the best displayed price, but liquidity and fees differ from venue to venue. See Exchanges, ECNs and Dark Pools.

How a retail order is typically routed#

1. Your broker receives the order and checks it against your account.
2. The broker sends it to a venue: an exchange, an alternative trading system or a wholesale market maker.
3. The venue executes it, often within milliseconds, at or better than the national best bid or offer (NBBO).
4. You receive an execution report. See Execution Reports and Trade Confirmations.

Smart order routers#

A smart order router (SOR) is software that splits and sends orders to the venues most likely to give the best result, considering:

Payment for order flow#

Some US brokers route retail orders to wholesale market makers that pay the broker for that order flow. This payment for order flow (PFOF) helps fund commission free trading. Market makers profit from the spread on many small orders and often execute them at slightly better prices than the displayed quote, called price improvement. Critics argue it creates a conflict of interest and may not always produce the best outcome. US brokers must disclose their routing practices and payments in quarterly reports under SEC Rule 606. See Best Execution and Execution Quality.

Direct routing#

Active traders on direct access platforms can choose the venue themselves, for example sending an order directly to a specific exchange to add liquidity and earn a rebate, or to a particular ECN. This gives control but requires knowing each venue's rules and fees. See Direct Market Access and Sponsored Access.

Routing in other markets#

• Futures: each contract trades on one exchange, so routing mostly means getting to that exchange quickly.
• Forex: brokers route to banks and liquidity providers or act as the counterparty themselves.
• Crypto: prices differ across exchanges, and some platforms aggregate liquidity from several exchanges, functioning like a smart router.

What routing means for you#

• Ask how your broker routes orders and read its disclosure reports.
• Compare execution quality, not just commissions: price improvement and slippage matter.
• For larger or less liquid orders, limit orders protect you regardless of routing.

Frequently asked questions#

What is smart order routing?#

Software that automatically sends and splits orders across trading venues to find the best combination of price, size, speed and cost.

What is payment for order flow?#

Compensation some brokers receive from market makers for sending them customer orders. In the US it must be disclosed.

Can I choose where my order is routed?#

On many direct access platforms, yes. Most retail apps choose the route for you.

Sources#

• U.S. Securities and Exchange Commission, Payment for order flow
• Wikipedia, Smart order routing