The Bank of Italy published a study showing that auto hedging has become widespread among market makers in the secondary market for Italian government bonds. Using MTS trade data from January 2010 to April 2026, the study finds that adoption accelerated sharply from the second half of 2020, with around one-third of trades auto hedged in recent years and activity peaking at about 40% in late 2024. These strategies allow dealers to offset exposures rapidly after their quotes are executed, reducing inventory and adverse selection risks. Persistent differences among market makers explain most of the variation in auto hedging, while liquidity conditions have a smaller but statistically significant effect. A one-standard-deviation widening in bid-ask spreads reduced the probability of auto hedging by about 1.76 percentage points, while a comparable increase in market depth raised it by about 1.47 percentage points. Adoption expanded to more than 22 market makers by mid-2025 and across nearly the full range of fixed-coupon bonds and bills. Auto hedging declined from early 2025, particularly among primary dealers, coinciding with the Italian Treasury’s introduction of a monitoring criterion for this activity in its dealer evaluation framework. The study says this pattern suggests that external incentives, as well as trading conditions and dealer-specific capabilities, can influence the use of automated hedging.
2026-09-14Bank of Italy
Bank of Italy study finds auto hedging surged in Italian sovereign bonds, dealer characteristics drive adoption
A Bank of Italy study finds that auto hedging has spread rapidly among market makers in Italian government bonds since 2020, accounting for around one-third of trades in recent years. Dealer-specific characteristics explain most differences in usage, while wider spreads and lower market depth modestly reduce adoption. Activity declined from early 2025, particularly among primary dealers, alongside a change in the Italian Treasury’s monitoring framework.