That "Syncing" Feeling About Conditionals

On today’s Wall Street playlist, conditional access into dark pools has been on heavy rotation¹. Brokers are feverishly building conditional routing into their ATSs while simultaneously creating outbound conditional connectivity to everyone else’s. The goal of conditionals is simple enough: allows algorithms to represent interest to trade across multiple dark pools simultaneously without committing the order to any one venue until an opportunity arises. In essence, to simulate the efficiencies of the what block crossing networks refer to as a ‘blotter sync.’

Intuitively, it makes sense to leverage these new routing efficiencies. But a deeper dive into FINRA data shows that, even with the proliferation of conditional routing to dark pools, most blocks in 2019 still occur in the same crossing networks where these blocks were executed two years prior.

When we compare ATS volumes from Q1 2017 to Q1 2019, we found that six consistently provided roughly two-thirds of all ATS blocks (Chart 1) as well as represent six of the top ten providers of blocks (Chart 2).

Additionally, these six crossing networks continue to provide 43% larger block prints than dark pools (Chart 3) with two crossing networks in particular providing an average execution sizes across all fills more in line with a pure block-seeking strategy (Chart 4).

Algorithms are certainly the most important and impactful trading technology of these last two decades. Conditionals are an exciting innovation that may drive more efficient routing and better access to key liquidity. The marketplace often gets excited by new functionality that potentially leads to a better quality of execution. It’s our role as market practitioners to temper such enthusiasm with a fair degree of scrutiny and prudence as our market continue to evolve.

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Craig Viani, Head of US Market Structure

¹As referred in https://tabbforum.com/opinions/conditional-orders-the-great-liquidity-aggregator/ which states “…conditional orders quickly are becoming the de facto method for buy-side traders to aggregate liquidity in a decentralized marketplace. Despite the widespread adoption of conditional orders, however, the complexities around evolving use cases, as wells as the fact that each ATS offers its own flavor of the order type, can be confusing.”