In TABB Group’s soon-to-be-published International Equity Trading benchmark research study for 2019, 79% of firms interviewed are currently using conditional orders to source liquidity for their clients, and more than 30% of these traders expect to increase usage in the next calendar year.
When looking at the response weighted by each firm’s US Equity Average Daily Volume, says Campbell Peters, a TABB Group US equity market structure research analyst and author of “Conditional Orders in Equity Trading,” the response grows to a very impressive 95% of firms using conditional orders. Further, no one said they planned to decrease their use, proving, according to Peters, that while there has been tremendous adoption of conditional orders among buy-side traders, “we will continue to see buy-side growth,” says Peters.
This use of conditional orders to aggregate systematic internalizer (SI) liquidity could have implications outside Europe. “If the MiFID II rules around dark trading and SIs expand to the US,” Peters says, “there will be an even greater demand to aggregate dark liquidity among various venues.”
Conditional orders allow portfolio managers to search for hidden block liquidity without fully committing to trade, as they allow the trader to represent larger orders in multiple venues without the risk of being simultaneously executed in multiple trading venues. The rise in conditional orders is directly linked to the advancement of algorithmic interaction between the liquidity-seeking broker algos and the ATSs that offer conditional orders. Conditional orders are financially demanding now more than ever
Routing of conditional orders in these liquidity-seeking algorithms comes in two variants: simultaneous venue routing and sequential venue routing. While conditional orders started out as mechanisms to trade blocks, conditionals are increasing being used for trading non-block size (100-1,000 shares). Not only have multiple venues expressed that their customers are exploring expanding their use of conditional orders, Peters points out that venues are also increasingly seeing conditionals being used with VWAP execution algorithms resulting in smaller conditional print sizes.
Initially developed exclusively for trading large blocks of shares, conditional orders have pivoted to be the de facto method for aggregating liquidity in a decentralized marketplace. Traditional buy-side traders continue to submit human-directed conditional orders for trading large blocks, while more sophisticated portfolio managers have implementing liquidity-seeking algorithms for moving considerable size.
As Peters notes, “marketplace fragmentation isn’t going away, as SI volume has grown to nearly 10% of the total off book volume in Europe since MiFID II was implemented.” For example, in March, Deutsche Bank announced it planned to launch a single-dealer platform (SDP) later this year, which would be the US equivalent of an SI, adding to the fragmentation of the US equity market, furthering the need for liquidity aggregation.
All these tailwinds are pointing toward wider adoption of conditional orders. “By addressing the needs of the buy side and beyond, conditional orders have demonstrated their value, which is why we expect they’ll become ubiquitous on institutional equity trading floors,” Peters says.
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