HedgeStreet
Encyclopedia
Nadex formerly known as HedgeStreet, is an electronic exchange
that allow trading in a number of financial derivatives
. Under US regulations, technically it is a Designated Contract Market (exchange) and a Derivatives Clearing Organization (clearing house
) subject to regulatory oversight by the Commodity Futures Trading Commission
.
event futures/derivatives exchange
. The company operates the HedgeStreet Exchange, which launched in October 2004 and provides traders
with a place where they can hedge against
or speculate
on economic events and price movements. The reasoning behind the creation of HedgeStreet was that with the rise of individual private investment in stocks, there might be a similar appetite for individuals to invest in derivatives. This focus on small investors created sufficient confusion that John Nafeh, founder of HedgeStreet, created the term "hedgelet" to help explain the company's business model.
"Hedgelets" come in two varieties: binary options and capped futures. Binary options are bets on outcomes, "yes/no" contracts, that pay out a small dollar
amount (e.g. $100) if final price of an instrument is above the strike price
and nothing if below. For instance, HedgeStreet launched Germany 30 Binary Options in 2008. The Germany 30 contract is based on the DAX
Equity Index Futures; if the estimate exceeds the strike price, the binary options pay out. A binary option is a contract with an all-or-nothing payout. BUY if you believe the market price of the underlying asset will settle above a specific strike at expiration. SELL if you think it won’t. The price of a binary contract is determined by the marketplace and represents the probability at the time of the trade that the underlying will exceed the strike price at expiration. If your insight proves correct, at expiration you get $100 (i.e., the full contract value). So, your profit equals $100 minus your initial investment plus fees. If you were incorrect, you lose only your initial investment plus fees.
As of mid-2006, the company had two major investment partners. The Chicago Board Options Exchange
purchased a minority stake in HedgeStreet in February 2006 and assists in marketing the company's "hedgelets". In March 2006, Norwest Venture Partners
provided a multi-million dollar investment in the company.
In 2007, UK based IG Group
announced intent to acquire HedgeStreet and later in the year completed the purchase of the company.
Soon after the acquisition, IG Group renamed HedgeStreet to the North American Derivatives Exchange (Nadex).
Exchange (organized market)
An exchange is a highly organized market where tradable securities, commodities, foreign exchange, futures, and options contracts are sold and bought.-Description:...
that allow trading in a number of financial derivatives
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
. Under US regulations, technically it is a Designated Contract Market (exchange) and a Derivatives Clearing Organization (clearing house
Clearing house (finance)
A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions...
) subject to regulatory oversight by the Commodity Futures Trading Commission
Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....
.
History
HedgeStreet was the first Internet-based government regulated (CFTC)Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....
event futures/derivatives exchange
Futures exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...
. The company operates the HedgeStreet Exchange, which launched in October 2004 and provides traders
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
with a place where they can hedge against
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
or speculate
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
on economic events and price movements. The reasoning behind the creation of HedgeStreet was that with the rise of individual private investment in stocks, there might be a similar appetite for individuals to invest in derivatives. This focus on small investors created sufficient confusion that John Nafeh, founder of HedgeStreet, created the term "hedgelet" to help explain the company's business model.
"Hedgelets" come in two varieties: binary options and capped futures. Binary options are bets on outcomes, "yes/no" contracts, that pay out a small dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
amount (e.g. $100) if final price of an instrument is above the strike price
Strike price
In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...
and nothing if below. For instance, HedgeStreet launched Germany 30 Binary Options in 2008. The Germany 30 contract is based on the DAX
DAX
The DAX is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system...
Equity Index Futures; if the estimate exceeds the strike price, the binary options pay out. A binary option is a contract with an all-or-nothing payout. BUY if you believe the market price of the underlying asset will settle above a specific strike at expiration. SELL if you think it won’t. The price of a binary contract is determined by the marketplace and represents the probability at the time of the trade that the underlying will exceed the strike price at expiration. If your insight proves correct, at expiration you get $100 (i.e., the full contract value). So, your profit equals $100 minus your initial investment plus fees. If you were incorrect, you lose only your initial investment plus fees.
As of mid-2006, the company had two major investment partners. The Chicago Board Options Exchange
Chicago Board Options Exchange
The Chicago Board Options Exchange , located at 400 South LaSalle Street in Chicago, is the largest U.S. options exchange with annual trading volume that hovered around one billion contracts at the end of 2007...
purchased a minority stake in HedgeStreet in February 2006 and assists in marketing the company's "hedgelets". In March 2006, Norwest Venture Partners
Norwest venture partners
Norwest Venture Partners is a global, multi-stage investment firm focused on investments in early to late stage venture and growth equity investments in U.S...
provided a multi-million dollar investment in the company.
In 2007, UK based IG Group
IG Group
IG Group plc is a British-based company trading in financial derivatives. While the majority of the company's activities are based in the UK the company has also expanded internationally...
announced intent to acquire HedgeStreet and later in the year completed the purchase of the company.
Soon after the acquisition, IG Group renamed HedgeStreet to the North American Derivatives Exchange (Nadex).
See also
- Prediction marketPrediction marketPrediction markets are speculative markets created for the purpose of making predictions...
- Futures marketFutures exchangeA futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...
- Binary optionBinary optionIn finance, a binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option...
s - Paper tradingPaper tradingPaper trading is a simulated trading process in which would-be investors can 'practice' investing without committing real money....