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New York Stringer Magazine’s take on Hedgestreet’s binaries

David Katz of New York Stringer Magazine makes the following observation regarding the regulated trading of binaries at Hedgestreet.com.

The option premium…represents the investor’s view of the odds that the event will occur.  HedgeStreet is careful to avoid the use of the terms “bet”, “odds”and “winnings”;  as a regulated exchange, they are eager to avoid being mistaken for a gambling enterprise. Their mission is, in fact, to bring the advantage of hedging instruments, previously only available in large denominations, to the retail market

The implications of offering these type of derivatives teeters on that edge of gambling when such short-term (2 hour) options are “trading” at-the-money. “Trading” is in quotes because, at this time, the volume in binaries is thin or non-existent. Binaries are virtually indistinguishable from a wager when, say, a 1.3325 10am strike binary is at $50 at 9.55 am when the EUR/USD is at 1.3325. At worst, if the underlying was for a small-traded stock with light volume, this would be manipulation; at best, even in FX, its a gamble.

So how does Hedgestreet’s regulated binaries overcome this perception? Its only a matter of time. In the late 1970’s when the first equity indicies were traded, and also in the 1980’s when the International Swaps and Derivatives Association came out with their contracts, the same gambling-mentality existed. As most people in the ISDA and managed-money know, derivatives are merely risk-management tools fitted to achieve certain objectives in one’s portfolio. Those institutions, too, endured the same challenges that Hedgestreet.com is experiencing.

Anyone in the financial world will depict — in hindsight — the higher rate of return equities provided over bonds and money markets going back 50 years. However, go back 50 years ago, were those money managers making the same observations? Those who cite history merely underscore the need for equities  — the beginning, crude form of derivatives — in ones portfolio. And as the 1980’s and 1990’s showed, mutual funds, hedge funds, equity options and ETFs were developed along the way. Hedgestreet.com seems no more different than the outgrowth of these products and services. The chasm they have yet to bridge is the retail suitability. As Katz points out, this indeed presents itself as a “mission.” And in that respect, naysayers will eventually dismiss the exchange as “gambling”, especially in its present form.

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3 Responses

  1. Jenna says:

    In response to HedgeStreet lack of liquidity/volume…a solution to that problem has just been announced. SIG and DRW market makers have invested $10 million

    SUSQUEHANNA AND DRW TO MAKE MARKETS ON HEDGESTREET®

    SIG, DRW Join CBOE as investors in Strategic Alliance with HedgeStreet

    SAN MATEO, CA, March 22, 2007 – HedgeStreet®, (http://www.hedgestreet.com/), the first all-electronic Event Derivatives Exchange, announced today that Susquehanna International Group (SIG) and DRW Trading Group (DRW) have launched market-making services on the HedgeStreet Exchange.

    In addition, SIG and DRW have taken investment positions in HedgeStreet. Together with a second investment from the Chicago Board Options Exchange (CBOE), HedgeStreet has closed its latest funding round.

    “With SIG and DRW, two of the largest and best market-making firms in the world, we expect better pricing, larger sizes, and narrower spreads for our trading members. We expect their influence to be profound as they phase in their participation on our Exchange. In addition, HedgeStreet plans to launch a compelling institutional platform later this year. That new platform will carry a similar range of contracts, in larger denominations,” said Stephen Race, Chairman and CEO of HedgeStreet.

    Eric Noll, Global Head of Strategic Relationships for SIG, said, “We’re very excited about the alliance with HedgeStreet. HedgeStreet reaches a broader range of traders, who we believe will benefit from our twenty years of market making expertise.”

    Donald Wilson, CEO of DRW, said, “HedgeStreet is breaking down barriers for the retail trading community. By introducing Binary options, HedgeStreet offers a simpler way for the average investor to trade directly on an Exchange in markets that were previously hard to access. We want to be a part of this new and growing marketplace.”

    William Brodsky, CBOE Chairman and CEO, added, “This strategic alliance enhances HedgeStreet’s ability to launch innovative new products. CBOE’s continued equity investment and alliance with HedgeStreet demonstrates our commitment to further developing this unique market.”

    HedgeStreet, which launched in 2004, offers Binary options on a variety of foreign currencies, commodities, real estate, hurricanes, and more. A Binary option is a contract between traders where the Buyer takes the position that a certain event will happen on the expiration date, and the Seller takes the position that it will not. This makes a Binary option a contract with a fixed payout of either $100 or $0, depending on the outcome of the event. With a deposit of just $100, any US resident can start trading on the HedgeStreet Exchange.
    # # #

    About HedgeStreet

    HedgeStreet Inc. is the only U.S. designated market that lets online investors trade innovative financial instruments based on economic events. A designated contract market (DCM) and a registered derivatives clearing organization (DCO), HedgeStreet is subject to regulatory oversight by the Commodity Futures Trading Commission (CFTC). For more information, visit http://www.hedgestreet.com.

  2. binaryoptions says:

    I’ve seen this press release on Hedgestreet’s web site. Its vauge. Its seems more promotional than anything else. Spreads on EUR normally are 10 pips or more with light volume. I remember during the 10 dollar contracts there was greater volume on HS

  3. Jim Lawson says:

    Hedgestreet has really improved its liquidity and pricing in the last fewe months. Plus they have a few new markets like economic derivs which are excellent to trade. While Hedgestreet is not perfect its moving in the right direction…and true the fx could get tighter…they always could get tighter 😉

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