Buy-side increasingly reliant on conditional orders for US equities

Asset managers turning to conditional orders to source US equity liquidity in increasingly fragmented landscape.

New research has found that the buy-side are growing increasingly reliant on conditional order types for US equities, according to consultancy TABB Group.

The upcoming International Equity Trading benchmark research study found that 79% of buy-side firms interviewed are currently using conditional orders to source liquidity for their clients. That percentage increases to 95% based on response weighted by each firm’s US equity average daily volume.

Furthermore, 30% of buy-side traders interviewed for the research said that they expect to increase their use of conditional orders in 2020, while there were no indications that usage would decrease.

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 of the use of conditional orders coincides with the emergence of systematic internalisers (SIs) following the implementation of MiFID II in Europe. While the regulatory regime currently does not extend to US markets, many firms are adopting compliant trading strategies and policies as a matter of global processes.

Increased market and liquidity fragmentation has meant buy-side firms are seeking out new methods of sourcing liquidity, and report author and US equity market structure research analyst at TABB Group, Campbell Peters, said that demand to aggregate dark liquidity among various venues is only set to increase.

“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 said.

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