Conditional orders have proliferated in the US and European markets but have been largely absent in APAC. A regional market structure shift is inevitable though as new entrants shift the liquidity landscape. 

Conditional orders involve posting an executable Indication of Interest (IOI) simultaneously across a number of venues, in order to increase the probability of a match and increase operational efficiency and ultimately reduce costs for the end client. For example, if a trader wants to execute an order for 100,000 shares, a conditional order for the full amount can be posted to five venues simultaneously, rather than posting say 20,000 at each venue. If there is a potential match, a corresponding firm-up request is sent to the venue which turns the conditional order into a firm order.

Conditional venues originated in the US and became a growing part of the trading landscape there between 2010 and 2011 due to the proliferation of trading venues and subsequent fragmentation of liquidity. In Europe, conditional venues launched after the market structure shift that occurred with the 2018 implementation of MiFID II regulations which included the unbundling of execution and research, and also placed limits on trading volumes in dark pools. As a result, electronic block trading and conditional order types increased in the EU because transactions above a certain size, defined as Large in Scale (LIS), were not included in the dark pool limits. 

Stuart Thompson, head of execution and quantitative services APAC, Liquidnet, said: “These factors have not been present in APAC and, historically, agency brokers in the region have just offered conditional access to their own dark pools.”

In addition, the vast majority of trading in APAC has occurred on lit exchanges, with the exception being Australia, Japan and Hong Kong, so there has not been much opportunity for the growth of conditional orders. However, a potential catalyst is the entrance of Cboe BIDS into the region. 

Thompson said: “A lot of investment banks and brokers have since started discussions about sourcing liquidity externally from outside their own four walls and it took an exchange’s conditional venue to legitimise that.”

David Barrett-Lennard, head of execution, Australia at Liquidnet, said “Australia is an outlier in APAC as there is a reasonable amount of fragmentation and a well-developed dark and block market which comprises around 23% to 24% of total turnover.”

“This makes Australia particularly appealing as a guinea pig to launch an exchange conditional venue,” added Barrett-Lennard. 

Another factor highlighted is that the buy side in Australia has adopted  Implementation Shortfall benchmarks that measure order performance from an arrival price which is much more conducive to trading at a price; which conditionals do. In contrast, asset managers in other parts of APAC generally use VWAP benchmarks which measure the volume weighted average price (VWAP) of trading for a stock during the day. In addition, he said Australia has quite a progressive securities regulator. 

Barrett-Lennard said: “We are certainly expecting some brokers to seek external liquidity and invest in the technology to be able to accommodate conditional orders. It will be fascinating to see how the market and sell-side interconnectivity evolves.” 

The buy side will be able to access conditional venues through an unconflicted  liquidity aggregator, such as Liquidnet, or potentially through an investment bank or broker. As conditional order acceptance and usage grows, Barrett-Lennard expects the electronic block market to challenge the dominance of the manual block market in APAC; certainly when it comes to available liquidity on a trader’s order pad. 

Global buy-side trading desks based in Asia are already accustomed to using conditional orders in the US and Europe, while Asia domiciled clients who are very Asia centric are asking about the benefits of the order type. 

The main benefits, according to Thompson, are: increasing the opportunity of transacting a block by effectively tapping into different sources of liquidity across increasingly fragmented markets; being able to use an algorithm without disrupting its schedule as it only triggers when there is an contra hence reducing market impact In addition, minimising information leakage and reducing the time horizon for a trade reduces market risk.

Thompson said: “Australia is going to be an interesting observation point for a lot of buy side firms to see how conditional orders could potentially trade in other countries. I anticipate it will be successful and we expect, and hope, that conditional orders can extend beyond Australia’s borders to more markets.”

After Australia, the expansion of the conditional market is expected to see development in Japan towards the end of this year. However, for conditional orders to be successful across APAC, the buy side’s benchmark and trading strategy would have to change or adjust to Implementation Shortfall. 

“That can really only be driven by the portfolio managers and traders on the buy side,” added Thompson. “That said, I do think that market structure can help expedite any shift.”

Thompson expects that conditional orders to develop in Australia, then progress to Japan, and then possibly Hong Kong. Barrett-Lennard highlighted that the shift will take time as the sell side and vendors need to invest in technology and the buy side needs to incorporate conditional orders in their workflow. 

“I’ll be very interested to see where we are in a year’s time,” said Barrett-Lennard. “As leaders and experts in dark trading, we are well positioned to build tools and partner with the buy-side trader to help navigate this new liquidity landscape in APAC as it develops and evolves, and that’s exactly what we’ve been doing.”