Broadway upgrades Duration Trader algo for automated hedging process

Rick Steves

“Broadway has worked closely with our European clients to enhance our Duration Trader algorithm and deliver the improved scalability, flexibility and performance needed to help these clients unwind risk, reduce hedging costs mitigate leakage.”

Broadway Technology has upgraded its Duration Trader algorithm to allow clients to unwind risk, eliminate inefficient manual hedging processes and reduce market leakage during an ongoing period of volatile European interest rates.

The algorithm can be deployed as an out-of-the-box and self-contained SaaS solution, with colocation either in Milan or Frankfurt.

Duration Trader addresses the lack of country-associated risk hedging

As European traders face increased pressure by extreme volatility and higher interest rate risks as seen in the rising spreads on peripheral bonds – especially Italy, Spain and Portugal – Broadway raises concerns for the lack of country-associated risk hedging, which makes it expensive and inefficient for traders who hedge their portfolio’s interest rates exposure with only bond futures, and manual hedging processes and inefficient tools can create information leakage and increase hedging costs as the market reacts.

To address the lack of country-associated risk hedging and related inefficiency, Broadway has enhanced its Duration Trader algo, which was designed to trade a basket of bonds that have different durations and efficiently hedge their risk.

Duration Trader allows Broadway customers to:
• Create or re-use a basket of securities they want to hedge against, adjusting some key parameters such as maximum and ideal exposure per instrument
• Calculate the best risk allocation within the basket, represented on basis point differences to the market mid and sizes equivalent of DV01 (dollar duration value)
• Select how much DV01 needs to be hedged, and execute multiple orders at once in the inter-dealer market within the pre-defined execution parameters

Ad-hoc baskets of government bonds and futures

Duration Trader allows traders to create ad-hoc baskets of government bonds and futures, identify the least expensive hedging allocation available and execute multiple orders at once to hedge their risk across all instruments.

Traders can move to an automated hedging process and keep pace with rapid market movements, reduce trading costs and minimize information leakage.

Brad Small, Head of Product at Broadway, said: “As volatility in the European interest rate market continues, it’s critical that traders have an automated, efficient and cost-effective method to manage country spread and hedge against risk in seconds, before the market can react. Broadway has worked closely with our European clients to enhance our Duration Trader algorithm and deliver the improved scalability, flexibility and performance needed to help these clients unwind risk, reduce hedging costs mitigate leakage.”

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