Multi-venue conditional orders are a key tool for brokers

Key Takeaways

• Buy-side firms gain control with detailed execution specifications.
• Sell-side firms use conditionals to navigate fragmented markets safely.
• Trading venues promote conditional flows as a key selling point.

Orders with conditional terms offer buy-side investment firms greater control by allowing them to specify in detail how execution should be carried out. But for the sell-side, conditional orders have a narrower meaning, particularly in European and North American markets. For the sell-side, conditionals provide a way to navigate an increasingly fragmented market landscape safely. For trading venues, support for conditional flows is a key selling point.

What are multi-venue conditionals and how are they used?

For the buy-side, a conditional order is any type of order that will only execute when certain predefined criteria are met. At the simplest level, these include the various types of limit order. They can also include more complex, multi-order strategies that allow the buy-side to specify in detail how orders should be executed, and deliver a richer service to their clients.

Sell-side brokers are faced with different challenges, most notably the difficulty of finding the necessary liquidity to achieve execution. In this context, brokers increasingly use conditional orders that work across multiple trading venues simultaneously. These are uncommitted orders that do not execute immediately, even if matching volume exists on the other side of the market. Instead, if contra-liquidity exists, a separate message is sent to the venue to firm up the order. This form of conditional order allows volume to be placed simultaneously in multiple venues while helping to manage overfill risk.

In an increasingly fragmented liquidity landscape, where more venues are competing for available trading volumes, multi-venue conditional orders are becoming a vital tool for brokers. Full-size orders can be placed at a conditional venue while smaller firm orders are executed elsewhere. If matching volume becomes available at the conditional venue, the routing broker can cancel other outstanding orders and firm up its conditional order. Multi-venue orders can enhance execution outcomes and make it easier to trade block liquidity, especially when algorithmic solutions are used to automate the process of managing the linked orders.

For traders, these cross-venue conditionals offer a way to search for hidden block liquidity without fully committing to a trade. Larger orders can be represented across multiple venues, increasing the chances of execution. But the fact that each order is uncommitted reduces the risk of simultaneous execution in more than one venue, preventing the order being ‘overfilled’. Initially developed for trading large blocks of shares, conditional orders have become the standard method for aggregating liquidity in a decentralized marketplace.

Traditionally, sell-side traders would manage conditional orders manually, even for large block trades. However, liquidity-seeking algorithms that can manage conditional orders automatically across multiple venues are becoming more common, allowing larger volumes to be traded more easily and securely. The continuing development of algorithmic solutions is making conditional orders more accessible to a wider range of firms.

What has driven the growth of multi-venue conditional workflows?

In the US and Europe, buy-side institutions have driven the growth of multi-venue conditional order usage by shifting a portion of their block liquidity-seeking order flow from blotter-scraping desktop applications to algorithms that incorporate conditional orders. As a result, most large broker-dealers in these regions include conditional orders in their order routing logic, and many venues support conditional order matching.

In both the North American and European markets, regulatory developments have stimulated the growth of a range of different trading venues that support conditional order flows. Both Alternative Trading Systems (ATSs) in the US and Multilateral Trading Facilities (MTFs) in Europe offer alternatives to the disclosure and reporting requirements of public exchanges. For such venues, supporting conditional orders has become a key selling point, and conditional workflows also help traders to manage the increasingly complex search for liquidity.

Technological and operational impacts

Managing orders across multiple venues simultaneously can be a significant operational challenge. Solutions must provide a high degree of control over how and when volume is released into the market. Rapid and reliable messaging is also crucial, allowing conditional orders to be firmed or pulled when required, and preventing overfills. The ability to customize messaging options can allow firms to use bespoke conditional strategies to meet their specific requirements.

The choices that brokers make when designing their conditional strategies reflect their overall objectives. If brokers are solely focused on securing matching volume whenever it becomes available, they can set orders to firm up (and other orders to be pulled) as soon as possible. If they are more concerned with securing the best available price, they may want to set a delay to allow time for other matches to be received. Other factors may also weigh on the decision. For example, a broker may favor a particular venue to minimize execution costs. Technological solutions that allow fine-grained control over these decisions can empower brokers to implement their algorithmic trading strategies in detail.

Multi-venue conditional orders have revolutionized the trading landscape by offering a sophisticated tool to manage liquidity and execution risks in a fragmented market. Their integration into trading workflows, supported by advanced algorithmic solutions, has enabled traders to navigate complex equity market structures more effectively. As conditionals become ever more important, buy-side firms need to ensure that their processes and solutions are equipped to handle conditional workflows across multiple venues.