July 3, 2019, Paris- Horizon Software (Horizon), the world’s leading provider of electronic trading solutions and algorithmic technology, has announced the release of a new volatility algorithm to automate volatility spreading strategies, and more generally dispersion trading strategies. This algorithm will be known as Hedged Vol Spreader (HVS).
Dispersion refers to the practice of selling index volatility while buying volatility on its constituents at the same time in a delta neutral fashion. The key benefit of this volatility strategy, if well implemented and automated, is to offer a volatility neutral exposure to the difference between implied and realized correlation on the index constituents.
Existing since the early 2000s, driven by the demand of hedge funds and coupled with the emergence of OTC volatility trading products such as volatility and variance swaps and lately corridor variance swaps, volatility spreading and dispersion strategy have become increasingly popular over the years and now trade in significant size between investment banks and their clients (e.g. a 10M USD vega ticket is common in the US).
Complex volatility trading needs are increasing and pushing volatility spreading and dispersion hedging strategies even further. With the new Horizon algorithm, traders can now simultaneously work, monitor and manage executions on a basket of long and short vega Hedged Volatility Orders (HVO).
Each HVO will be controlled by our new HVS order and target a vega amount on a specific range of options and maturity, auto-hedge delta, and manage refill and execution. Our HVS algorithm will bring volatility trading and hedging to the next level.
Vincent Dumontoy, Global Head of Client Solutions and Services at Horizon commented: “With this new Horizon algorithm, it has never been easier to implement a dispersion strategy traded as principal or hedge a dispersion package traded with clients. It is a strong requirement among our clients and we’re happy to provide them with an automated solution that will simplify their dispersion trading with a high level of monitoring through the full order cycle.”
Dumontoy continued: “As customisation of automated trading strategies is on the rise across the board, be it on an asset class or functionality level, our core product strategy is to deliver the right technology to support all kinds of advanced automated trading strategies, from design to implementation, while maintaining a short time to market. As such, our algorithm framework is one of our key strengths and a major element of our product roadmap. Highly flexible and user-friendly, our algorithmic framework has been recently enhanced to allow delivery of algorithm libraries, which clients will then be able to use to develop their own strategies much more easily and efficiently. Additionally, it now also allows inter-algorithm dependencies which enable the integration of complex algorithms into a coordinating / monitoring algorithm such as HVS. And from this perspective, we believe Horizon is perfectly positioned to benefit from current and future market trends.”