[ A D V E R T O R I A L ]
“These race conditions are prevalent and we
need to think very carefully as the European
conditional market expands as to how that risk
can be limited.”
What are some of the potential
structural issues associated with
the order type?
CJ: We have seen from the prolifer-
ation of the automated conditional
order type in the US that one has
to be very careful with how a con-
ditional order is managed across
multiple venues.
One subject that constantly
comes up - and we have already
seen some indications that it is
becoming an issue in Europe - is
what we call ‘race conditions’.
Race conditions are when an
order is sent to multiple venues
on a conditional basis, and then
the automated firm-up request
is received by the counterparties
associated with a particular match
at the same time, at more than one
venue. It then becomes a lottery as
to which venue gets the firm-up,
and often neither side firms up on
those conditional orders – creating
a situation where the two counter-
parties would actively like to trade
with each other but are unable to
meet and firm-up that order in the
same venue.
These race conditions are prev-
alent and we need to think very
carefully as the European condi-
tional market expands as to how
that risk can be limited.
So, what is the best way for asset
managers to use these conditional
order types?
CJ: We would suggest caution
before entering into a multiple
conditional environment.
Liquidnet has done a lot of work
in our own business to manage
the manual conditional firm-up
process, and as our members will
tell you, we police that very clearly
with a metric called Positive Action
Rate (PAR) to ensure that be-
haviour is of a high quality within
that conditional process.
We are now extending that ex-
pertise to the automated space, and
working closely with our members
as we roll-out automated condition-
al access to venues such as BIDS/
BATS and Turquoise. Based on the
knowledge we have gained over
many years managing the manual
conditional process and policing it,
we will ensure that those orders are
managed appropriately - avoiding
wherever possible the occurrence
of race conditions.
Policing this process is important
because if you have an order out on
a conditional basis, you are offering
the market a ‘free look’ at that size
and there are many examples of
situations where counterparties
have deliberately failed to firm-up
on a conditional order but sought
to benefit from the knowledge that
there is a large order out there.
That kind of free look goes to the
heart of the problems associated
with the conditional order type.
What do you suggest are the best
next steps to take?
CJ: Asset managers that are look-
ing to benefit from the potentially
significant additional liquidity
that a conditional order structured
market provides should take a lot
of time to understand the exact
process that different providers are
going through to:
• provide access to these venues
• allocate orders across these
venues
• manage the firm-up process
• avoid the race conditions
• police and monitor the firm-up
rate, and understand what steps
would need to be taken when
it has not been appropriately
firmed-up
So, what’s next?
CJ: The conditional order type will
provide an excellent response to
the MiFID II emphasis on Large-
In-Scale (LIS) crossing. We’re
already seeing signs that average
trade size is increasing. Liquid-
net have now added outbound
automated conditional access to
BIDS and Turquoise BDS to all our
liquidity-seeking solutions and are
working closely with our mem-
bers to ensure their interaction
with these venues is controlled
and appropriately measured. We
are extending our Venue Ranking
Model to measure the quality of
these new venues and the extent of
any toxicity.
Automated conditional orders are
set to greatly improve the distri-
bution of block liquidity, however,
rigorous policing of the firm-up
process and developing strategies
that prevent race conditions will be
critical to long-term adoption and
success by the markets in Europe.
Issue 51
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