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[ A D V E R T O R I A L ] CONDITIONAL CONFUSION? The advent of new automated conditional order types in a number of trading venues ahead of MiFID II has left many asset managers scratching their heads. We interviewed Chris Jackson, EMEA head of execution and quantitative services at Liquidnet to help clarify the potential opportunities and pitfalls. What are conditional order types? Are they new? Chris Jackson: Conditional orders are considered the most basic form of trade automation – essentially trade orders that are automatically submitted or cancelled if speci- fied criteria are met. Liquidnet has actually been using manual conditional order types for over a decade – it is a critical part of the value proposition in the pool as our members get access to far greater liquidity than if all orders had to be firm only. Automated conditional order types have been growing in pop- ularity recently on a number of venues, and are similar to the man- ual type but the firm-up process is instantaneous and expected to be close to 100%. On BIDS/BATS the firm-up is limited to a maximum of 2 seconds (sell-side) or 30 seconds for the buy-side. On Turquoise BDS, the firm-up time is limited to 500 milliseconds. A key advantage of the manual conditional is that our members 34 TheTrade Spring 2017 average trade size is so high com- pared to other venues. Chris Jackson, EMEA head of execution and quanti- tative services tend to be more confident to show real size because they get a ‘last moment to check’ before firming up an order. This pause is one of the key reasons why the Liquidnet What are the potential downsides? CJ: Though there are advantages to this order type when sourcing liquidity, equally it can come with frustrations if someone ‘fades’ on a match, particularly in fast markets. Our members know we take the policing of our pool very seriously and we work closely with individual participants to ensure behaviour is appropriate. However, as automat- ed conditional orders are always considered firm, the order size will often tend to be smaller due to the way that systematic orders are executed. Different providers of automat- ed conditional order types will have varying methods for policing the firm-up process. BIDS/BATS operate a periodic scorecard, while Turquoise BDS publish the firm’s reputational score on a real-time ba- sis. This allows the broker to adjust behaviour in real-time to ensure that the firm-up rate remains high.