BNP Paribas unveils DMA gamma hedging algorithm

The new DMA gamma hedging algorithm is designed to provide clients with a fully automated way of managing their gamma profile in an FX options trade

BNP Paribas unveils DMA gamma hedging algorithm
Asif Razaq

Asif Razaq

BNP Paribas has released an FX algorithm to enable automated gamma hedging. Asif Razaq, Global Head of FX Algorithmic Execution at BNP Paribas, describes the unique features of the new algo strategy and how it is uniquely built to support options trading in today’s markets. The new DMA gamma hedging algorithm is designed to provide clients with a fully automated way of managing their gamma profile in an FX options trade. Razaq explains that this monitoring has in the past been a very mundane, manual process with most clients have various gamma profiles which they needed to separately monitor at any one time. It also differs significantly from existing gamma hedging strategies, which are often designed to execute exclusively against the bank’s liquidity and, every time the algo would trade, it would pay a spread to enter into that transaction, which proved quite a costly exercise for some clients to execute in that manner. 

“Instead, this new algorithm is unique as rather than exclusively trading against the banks own liquidity, we’re opening the doors and allowing clients to access the liquidity of the entire market,” says Razaq. “For the first time, clients can now also capture spread rather than paying the spread when it comes to executing all their orders.”

The new strategy also benefits from two intelligent automation features. The first is in-built momentum protection, which constantly tracks how the market is moving. “With momentum protection, the algorithm is able to recognise when there’s very sharp and quick moves in the market. This means that rather than the algo executing all orders in the move, it is able instead to wait until the market gets to the top and then execute the balance, locking in a much better profit level for the client,” Razaq explains.

A second unique feature of the algorithm is Smart Mode, which allows the algo to compare the historical market volatility seen in the previous week and run simulations internally to determine what the optimal spacing for placing orders should be. Once clients have input their gamma profile into the algorithm, they are also able to preview how the algorithm is projected to execute. Clients are then able to either accept what the algorithm has presented or can further fine-tune changes if needed before submitting the order. In addition to long gamma profiles, the algorithm also supports short gamma. “This is more challenging, as the algo needs to work with a lot more stop-loss orders,” Razaq says. 

A further weakness of existing gamma strategies is that they only really support a linear gamma profile. “However, most of our clients don’t just have one options trade but multiple trades,” says Razaq. “If they are using the algo for multiple options trades it means the gamma profile is non-linear, so the algorithm has to factor in the entire portfolio when it comes to execution. And that’s a new service that we now support in helping clients manage non-linear gamma profiles.”

Finally, the range of currencies that is supported by the algorithm is vast and it is also available to trade NDF pairs. The algorithm essentially automates the entire process as it designed to be left running in the background, not just for a few hours, but days. “Clients can delegate the entire management of their gamma execution to this strategy,” Razaq says.

The algorithm also utilises the platforms next generation tools developed by BNP Paribas,
such as the first FX digital trading assistant - ALiX and Insight Live - the real-time TCA dashboard.