In the comprehension of any message or story, the “rule of three” is crucial. It proposes that a trio of segments, events or characters is most effective in the construction, communication, and cognition of any overarching concept. As such, we leverage the “rule of three” to draw insight on the complex optimization problem when routing orders between venues to achieve best execution.
In defining this optimization problem, we acknowledge three key factors that impact the order routing decision. These three factors represent the beginning, the middle, and the end of the order routing lifecycle:
1. orderbook state (beginning)
2. likelihood of execution (middle)
3. execution performance (end)
When applying the “rule of three” framework, we derive some interesting insights across all three of the aforementioned factors. They provide a better picture of the pros and cons of prioritizing one venue over another when posting liquidity.
Such insights include; the “realized” distribution of European Best Bid and Offer price level executions across venues, the significant difference in aggressive order arrival dynamics between venues, and how difference in perspective can influence perception of execution performance.
Taking these all together, we can see that venues that rank highly across all three key factors will be integral to successful order routing strategies. Read all about it in our latest Trading InfoSnack The Rule of Three: Analysing the Best Execution Optimisation Problem.