Smart Order Routing Technology in the New European Equity Trading Landscape

In Europe, fragmentation of execution venues has been triggered by increasing competition among markets and a new regulatory environment set up by MiFID. Against this background, IT-based sophisticated order routing systems (Smart Order Routing systems) promise to assure efficiency despite fragmented markets. This raises the question on the relevance and economic value of this technology in European equity trading. Based on order book data for EURO STOXX 50 securities of ten European electronic execution venues, this paper assesses the potential of Smart Order Routing technology by measuring the performance of actual executions in European order book trading relative to a Smart Order Router implementation that detects and accesses best European prices. We identify 6.71% full trade troughs and 6.45% partial tradethroughs in our dataset enabling for significant absolute and relative savings. This indicates that Smart Order Routing technology can provide business value by improving order executions in European cross-tradable equities.