Instinet Europe is launched a so-called SmartRouter service, which aims to automate the search for best execution. The company says this is the first facility of its kind for European equities to be made available to institutional investors.
Instinet says “smart routing” is necessary to achieve best execution where the best price for an order can potentially be achieved by accessing multiple trading venues such as exchanges and MTFs. Instead of requiring a human trader to scan the prices available across markets and make decisions about how to route portions of an order, SmartRouter automates and manages the process with greater speed than a human trader. “Without such a facility, many brokers and traders simply don’t have the capacity to consider liquidity in all venues, and may miss opportunities to trade at more favourable prices,” says Instinet.
Instinet SmartRouter is designed to achieve best execution on every order by applying sophisticated routing algorithms that consider price, speed, displayed liquidity, hidden liquidity and clearing costs to optimise the routing of orders across available liquidity pools.
With the advent of the London Stock Exchange Dutch Trading Service last May, genuine competition has begun between European exchanges – with competing liquidity pools and homogenous clearing and settlement.
Instinet reckons forthcoming European regulation will stimulate further competition by allowing MTFs, a new category similar to ECNs in the US, to compete for liquidity. Such competition, which will drive down costs for investors, can only flourish if Smart Routing is used to automate the search for the best price across markets, and thus re-aggregate competing liquidity pools.
When competition between exchanges and ECNs began in the United States, Smart Routing was not immediately available, and many market participants complained about ‘fragmentation’ of liquidity. Since the introduction of Smart Routing, now widely used by investors and brokers in the United States, the NASDAQ market in which NASDAQ, Arca-EX and INET compete has become the most liquid and cost efficient equity market in the world, with prices to market users having fallen by more than 90% and volumes doubling in five years.
By making its SmartRouters available for European equities, Instinet hopes both to help stimulate competition between exchanges and to help institutional customers meet their best execution obligations reliably and at low cost.
“We are very fortunate to be able to leverage the superior technology of our US Equity Smart Routing capability to launch a similar initiative for European equities,” says Natan Tiefenbrun, President of Instinet International LLC. “At Instinet, we are aware of the pressures that the investment industry is facing and as the UK and European regulators look ever more closely at the definitions of best execution, so we want to be in a position to offer our clients access to technology that helps them meet their fiduciary obligations. Smart Routing for European securities is designed to ensure that Instinet’s clients have fast, efficient and direct access to the best available prices and, as a result, clients can be sure they are acting in the best interests of the end investor by maximising their performance.”
Instinet’s Smart Routing service is available initially for Dutch equities which trade concurrently on Euronext Amsterdam, the London Stock Exchange and on Instinet’s own Continuous Block Crossing platform (CBXsm). Regulated as an MTF, Instinet’s CBXsm is a peer-to-peer block trading system that facilitates direct and anonymous negotiation amongst Instinet’s network of institutional customers, and is the only off-exchange alternative for clients normally subject to exchange concentration rules.
Instinet clients can access the European Smart Routing capability at no extra cost through either of Instinet’s front-ends, Newport or InstinetAdvance, via FIX, from third-party order management and execution systems, or via any of Instinet’s algorithmic trading solutions including VWAP, Trading Rate or Pairs Trading Rule.
SmartRouters uses a price-sensitive spraying algorithm to achieve the best available price on marketable orders by systematically scanning all exchanges and MTFs trading a particular security, and by routing portions of the order to each venue accordingly. In addition to finding the best published price, the algorithm is designed to consider both displayed liquidity and the potential non-displayed liquidity and prices that some venues support. The non-marketable balance of any order is posted in the market(s) designated by the client.