Agency broker Bloomberg Tradebook has released MTRX, an algorithm and supporting functionality for risk-based spread trading in the futures markets.
The new futures pairs algorithm and function enables a trader to select a futures bond spread, convert it to a yield and then monitor and trade the spread depth. The displayed size takes into account a duration hedge.
When trading, the algorithm seeks to execute the spread at or within a yield spread target value to avoid the negative effect of convexity – a measure of how sensitive a bond’s duration is to interest-rate shifts. According to Tradebook, the new capability also saves the time usually required to perform calculations to duration-weight each trade.
According to Brian Coffaro, manager of derivatives development at Bloomberg Tradebook, using futures to trade the yield curve or to take advantage of yield differentials between sovereign nations can be risky. Many trading platforms are not fully integrated with the market data and analytics needed to drive comprehensive trade ideas, he argues, adding that performing the calculations needed to duration-weight each trade can introduce excessive opportunity cost.
“With the development of both yield trading and embedded duration calculations, Tradebook seeks to execute a comprehensive yield-based strategy in one ticket,” Coffaro said in a statement.