Delta Neutral Strategies (DNS) let investors hold options without exposure to price changes in the underlying asset. This is achieved by balancing the portfolio with a specific amount of the underlying instrument to offset the options' delta. While DNS have been around for decades, mostly executed manually in the wholesale market, now we see a trend in automatising this part of the market, too. As for example, MX is about to join the growing number of derivatives markets, making DNS execution simpler with specialized tools.

What is noteworthy now though, is that many of the exchanges supporting DNS already offer some form of additional auction mechanism, including CBOE Complex Order Auction, Eure Improve, ISE Complex Auction Order, and Euronext Request for Cross Facility. This is surprising as most of the DNS volume executed on exchange tends to be simply block trades where both sides of the trade already agreed the terms of the execution^[1]. However, those additional auction mechanisms might just be the right tool to let DNS adaptation grow even further, as they can help find highly fragmented liquidity.

Finding on-screen DNS liquidity can be daunting. Every strategy requires a specific quantity and price of the underlying leg; the chance of finding easily accessible on-screen liquidity is close to none. Heck, just sharing with the wider market your own delta estimates for a given strategy is risky and may invite freeriders. Thus, the buy-side seeking the sell-side assistance to uncover hidden liquidity is natural. While the sell-side will provide a price as requested, the buy-side will struggle to judge price quality without any transparency. This is where an auction mechanism can provide added value. It allows prop firms to swoop in and offer better prices if they can estimate it in less than 100 to 150 milliseconds (depending on the exchange). As a result, buy-sides will receive even better prices in a market that has limited pre-trade transparency. Sell-sides can credibly signal to their clients that they are confident in the quality of their prices and prop firms can provide very bespoke liquidity to counterparties without having to establish a commercial relationship first.

All I need now is a yet another feature that makes the rebalancing of my strategy more convenient. But I guess, that is one for another day.