When you place an order for a stock or a crypto token, your US Dollars don’t magically turn into financial assets. Behind the scenes, a complex process called order routing ensures that your trade goes through.
Order routing is often overlooked. But it's an important part of successful trading.
In partnership with TradeStation, we’re going to break down how order routing works, when you need to be concerned with it, and how TradeStation makes it happen for its customers efficiently. If you haven’t checked out TradeStation lately, learn more about trading stocks and crypto on their platform here >>
What Is Order Routing?
When an investor or trader places an order through a stock brokerage or crypto exchange, the broker must find a way to execute that trade. Brokers may choose to execute an order directly through an established exchange, or they may send the order to a market maker to fulfill the order in a “dark” pool.
Stock Order Routing
In the world of stocks, the Securities and Exchange Commission (SEC) has established National Best Bid and Offer (NBBO), a platform to provide nationwide visibility to current prices. As a result, all stock orders that can be fulfilled will be filled instantaneously at a price in between the best bid and offer on the exchange.
However, stock brokers may choose to route an order through an Alternative Trading System where companies called liquidity providers may provide a better price. In general, most brokers have “smart” or automated order routing. This allows the brokerage to use an algorithm to determine the best way to route each order.
Crypto Order Routing
Crypto traders don’t have all the advantages of stock traders. Since there is no single centralized exchange for all crypto trades, it's up to each individual platform to find liquidity. The challenge is exacerbated by volatile prices, slow order execution on certain blockchains, and limited liquidity for large orders.
As a result, crypto brokers that have smart order routing offer an advantage to crypto investors looking to buy or sell. And this is what makes TradeStation different compared to other platforms that trade stocks and crypto.
Today’s crypto landscape is made up of so-called “exchanges” and other fragmented pool of liquidity. For many platforms, connections between different exchanges is limited and traders may not always get the best price. TradeStation Crypto, however, isn't bound to a single exchange. Instead, it has the flexibility to provide access across multiple liquidity sources - giving you, the customer, the best prices.
TradeStation Crypto can connect to exchanges, OTC desks, market makers, and other electronic liquidity pools. The end result is that your trades should execute at better prices (and maybe faster as well).
What Are The Benefits Of Smart Order Routing?
Order routing may sound like a relatively mundane topic. However, smart routing can lead to three advantages for both crypto and stock traders.
Price Improvement
Brokers that offer smart order routing may have optimized price improvements. Price improvement happens when an order is sold at a higher price than expected or purchased at a lower price.
Companies with smart order routing regularly analyze their results to ensure that prices are as advantageous as possible for their customers.
For example, TradeStation regularly monitors trade execution to ensure that prices are as favorable as possible for customers. In the fourth quarter of 2020, the company executed more than $25 million in price improvement for its customers.
Speed Of Transaction
In today’s lightning-fast world, stock trades often take place in milliseconds. The liquidity of “dark” trading pools and centralized exchanges makes it easy to find matches.
But crypto trades usually aren't so fast. Since crypto tokens have decentralized exchanges, many buy and sell orders take minutes or hours to complete. However, some companies like TradeStation are starting to aggregate pools of liquidity to increase the quality of order execution.
Crypto traders may see significantly faster transaction speeds by using platforms that offer such intelligent order routing. TradeStation's pooled liquidity network, for instance, can execute crypto orders near-instantly at favorable prices.
Ability To Fulfill Orders
Stock traders largely take order fulfillment as a given. Most trades, even from discount brokers, are executed within seconds if they're at the market price. Crypto traders can't count on that, especially if they have large orders.
Since the crypto world has fewer market makers, brokers play an especially crucial role in finding liquidity to place orders. Liquidity aggregation technology is critical to making this work.
When Does Order Routing Matter?
Stock brokers in the United States are required by the SEC to execute orders to the best of their ability and to seek the most favorable execution for customers. Since most online brokers have similar stock routing processes, most stock traders won't see a significant competitive advantage from smart order routing.
The firms employing these techniques may have hundreds of bot traders executing large numbers of trades each day. However, typical stock traders don’t need such advantages. Stock trades made in the market are typically filled within seconds regardless of which market maker a broker uses.
But if you’re someone who places hundreds of trades, you may want to consider the role that price improvement plays for you. Platforms that focus specifically on price improvement may yield enough “penny savings” that you’ll see major yield differentials over time.
On the other hand, most crypto investors (even those who don’t actively trade) can benefit from smart order routing. Crypto prices are extremely volatile and the decentralized nature of most blockchains makes order fulfillment more cumbersome. Additionally, most blockchain tokens have less trading activity compared to large stocks. As a result, how an order is routed can affect both the price a person receives and the speed of a transaction.
Crypto exchanges work as market makers. But independent crypto platforms (like TradeStation) may be better suited to aggregate liquidity and route orders to the proper exchange.
How You Can Improve Your Trade Order Routing?
As an individual, you have limited capabilities to improve order routing on your own. In many cases, the best way to get better results is to look for brokerages that specialize in intelligent order routing. This is especially true when it comes to crypto traders who need to find liquidity for smaller tokens.
If you’re wanting to invest in various assets - such as stocks and crypto - and want the assurance that your orders are executing efficiently, check out TradeStation. They handle the details so you can focus on what matters most to you: building wealth.
Check out TradeStation here and get started >>
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared toward anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications, including the New York Times, Wall Street Journal, Washington Post, ABC, NBC, Today, and more. He is also a regular contributor to Forbes.
Editor: Clint Proctor Reviewed by: Chris Muller
