An Execution Waterfall, within trading systems, describes a predefined, sequential process for routing and fulfilling a trading order across multiple liquidity venues or brokers. Its primary purpose is to optimize order execution by prioritizing access to liquidity sources based on criteria such as price, speed, cost, and order size. This systematic approach aims to achieve the best possible execution price while minimizing market impact and slippage.
Mechanism
The mechanism operates by first attempting to execute an order, or a portion thereof, at the most preferred venue or with the highest-ranked liquidity provider. If the order is not fully filled, the remaining quantity is automatically routed to the next prioritized venue in the sequence. This iterative process continues until the order is completely filled or all available venues in the waterfall have been attempted, adhering to predetermined routing logic.
Methodology
The methodology for configuring an Execution Waterfall involves a strategic assessment of available liquidity pools and their historical performance characteristics. This includes analyzing factors like spread competitiveness, depth of order books, latency, and fees associated with each venue, especially relevant in fragmented crypto markets. The framework often incorporates smart order routing algorithms that dynamically adjust the waterfall sequence based on real-time market conditions and the specific parameters of the incoming order.
The removal of the SSTI waiver fundamentally alters RFQ liquidity by increasing pre-trade transparency, forcing a strategic repricing of risk by dealers.
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