Order Routing Discretion

## Typical Clause Language

Order routing discretion clauses typically read:

> "The Company has full discretion to determine the execution venue or liquidity provider to which client orders are routed, based on the Company's execution policy and prevailing market conditions."

This gives the broker significant control. Let's examine what this means and what guardrails should exist.

## Why Brokers Need Discretion

Some level of routing discretion is necessary and appropriate:

### Legitimate Reasons for Discretion

- **Market conditions change** - What's best at 9 AM may not be best at 3 PM
- **Liquidity varies** - Some LPs quote better for certain pairs or sizes
- **Technical issues** - Need to route around system outages
- **Order characteristics** - Different handling for small retail vs. large institutional orders

<MarginNote>The key is whether discretion is used in clients' interests or the broker's interests.</MarginNote>

## Types of Routing Discretion

### Full Discretion (Unbound)

> "The Company may route orders to any execution venue or liquidity provider at its sole discretion, without prior notice to the client."

**Analysis:** Maximum flexibility for the broker, minimum transparency for clients. Should be paired with strong best execution commitments.

### Guided Discretion (Preferred)

> "Orders are routed based on predetermined criteria including price, liquidity, execution speed, and counterparty credit quality. The Company maintains discretion to deviate from normal routing when necessary to achieve best execution."

**Analysis:** Provides a framework while allowing flexibility. More transparent and accountable.

### Limited Discretion (Restrictive)

> "Orders are routed to execution venues in the following priority order: [list]. The Company will only deviate from this sequence if the preferred venue is unavailable or unable to provide reasonable execution."

**Analysis:** Very transparent but potentially rigid. Rare in retail forex.

## What Should Limit Discretion

Even with routing discretion, certain guardrails should exist:

### Best Execution Requirement

Discretion should be <HighlightText variant="yellow">bounded by best execution obligations</HighlightText>. The broker can't route orders in ways that systematically disadvantage clients.

### Conflict Management

If the broker benefits from routing to certain venues (rebates, payment for order flow, etc.), this must be disclosed and managed.

### Transparency Requirements

Some policies specify:
- Periodic reporting on routing destinations
- Explanation of routing criteria
- Statistics on execution quality by venue

## Smart Order Routing (SOR)

Better execution policies describe systematic routing logic:

> "Our Smart Order Routing (SOR) system evaluates available liquidity across execution venues in real-time, considering price, depth, speed, and historical fill rates to determine optimal routing for each order."

<HighlightText variant="blue">Algorithmic routing</HighlightText> reduces human discretion and potential for bias.

## Questions About Routing Discretion

### How Many Execution Venues Do You Use?

A single venue means no real routing decisions. Multiple venues enable genuine comparison and selection.

### What Criteria Drive Routing Decisions?

Look for specific factors:
- Price comparison
- Liquidity depth
- Historical execution quality
- Venue latency
- Reject rates

### Do You Receive Payment for Order Flow?

If the broker receives rebates or payments from certain venues/LPs, this creates an incentive to route there regardless of execution quality.

### Can Clients Choose Execution Venues?

Some institutional offerings allow venue selection. Retail platforms rarely offer this.

## Red Flags

Be cautious if the policy:

- States "sole discretion" without mentioning best execution constraints
- Provides zero transparency into routing criteria
- Doesn't address conflicts of interest
- Reserves the right to route orders internally without external price comparison
- Changes routing arrangements frequently without notice

## Example: Strong Routing Language

> "Orders are routed to execution venues based on a pre-trade evaluation of price, liquidity, and execution quality. Our routing algorithm selects the venue offering the best combination of these factors for each specific order. The Company maintains discretion to override the algorithm when necessary to achieve best execution, with all overrides subject to internal review."

**Why This is Good:**
- Describes the normal process (algorithmic)
- Allows necessary flexibility
- Includes accountability (internal review)
- Implies best execution constraint

## Example: Weak Routing Language

> "The Company routes orders at its complete discretion. The Company is not obligated to seek or obtain competitive quotes from multiple sources."

**Why This is Concerning:**
- No routing methodology described
- No best execution tie-in
- No accountability or transparency
- Allows routing to a single source without comparison

## The Bottom Line

Routing discretion is necessary, but should be:
- Constrained by best execution requirements
- Transparent in methodology
- Subject to monitoring and review
- Free from undisclosed conflicts

The best policies describe systematic routing processes while maintaining flexibility for exceptional situations.