Streamline your trading: The power of composite orders in modern markets

Key Takeaway

• Composite orders streamline workflows and increase efficiency for sell-side brokers.
• Automation of order compositing can reduce manual errors and improve operational efficiency.
• Order management solutions maintain the benefits of compositing in the face of increasing order volumes and complexity.

Compositing is a crucial order management tool for sell-side brokers. The ability to combine similar orders and manage them as one is an invaluable way to streamline workflows and increase efficiency. Composite orders also offer advantages to sell-side firms, seeking equitable execution for their client orders. However, as volumes increase, and order flows become more complex, compositing is becoming technically difficult. Order management solutions must respond to these challenges to allow both buy- and sell-sides to continue to reap the benefits of composite orders.

Institutional buy-sides frequently send multiple orders to their sell-side broker on behalf of different underlying funds and clients, from institutions to retail investors. Although these orders are dispatched separately, the expectation from the sell-side is that the buy-side will achieve equitable execution outcomes across the board.

For the sell-side, the easiest way to achieve this is by compositing multiple orders together, so that they are routed and executed as one. This has the obvious benefit of reducing the burden on individual traders, as they have fewer orders that require attention. It is also much easier to demonstrate that orders have been treated equitably, and to achieve the same execution outcome. Once the composite has been executed, fills can then be allocated back to the underlying customer accounts.

Aside from the indirect benefits of equitable execution outcome, compositing also offers more tangible benefits to the buy-side. Compositing multiple instructions into a smaller number of market orders means lower brokerage charges from the buy-side. This is especially important in the context of growing amounts of retail orders – compositing provides an ideal way for both buy- and sell-sides to handle retail flow in a cost-effective and efficient way.

From an operational perspective, order compositing is a good candidate for automation. Manually finding and compositing suitable matching orders is time-consuming, with considerable potential for errors. These drawbacks can easily cancel any efficiencies generated from managing orders together. It’s relatively straightforward to create clear rules about which orders should be composited, based on the parameters of the orders themselves. These rules can then be implemented as the basis of an automated compositing solution.

However, algorithmic orders introduce complications. Since their behavior is more complex than standard orders, they tend to have many more parameters. These control how the order is to behave in the market, covering price strategy, volume release, and many other factors. The high number of parameters makes it harder to match and bundle orders automatically for compositing, as there are many more potential points of difference for each order. Nonetheless, it’s not practical to for sell-sides to manage algo orders separately. Automated solutions must take account of this complexity, and have the capacity to handle it.

In addition to the compositing process itself, automation can offer benefits throughout the order lifecycle, empowering traders to handle more order flow more effectively. But it’s important that solutions also enable manual intervention when needed. This is especially true of algorithmic order flow. Sell-side traders must be able to respond to client requests like changes to trading instructions, or to update algo parameters to reflect changing market conditions. Manual intervention allows buy-side traders to apply their knowledge and expertise to add value for their customers.

Composite orders have demonstrated their value to both buy- and sell-side firms and are likely to remain a crucial tool for agency order management. But in a dynamic and developing market environment, compositing solutions cannot remain static. Functionality needs to evolve to enable automation even in the context of increasingly complex order flows and demanding client requirements.