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Andy, Financial-Spread-Betting: Hello, Perhaps we could start by hearing a little of your background. When did you get into the trading world? How long have you been with HedgeStreet? Tell us a little about yourself.
Russell Andersson, VP Instrument Origination and Co-Founder of HedgeStreet: I started my career in the trading world by working at a London Based Hedge Fund in the fall of 1997. The fund specialized in emerging market currencies and debt.
Andy, Financial-Spread-Betting: Ok, so HedgeStreet.com opened its doors when?
Ursula Burger, VP Corporate Marketing and Co-Founder HedgeStreet: HedgeStreet was launched in October 2004.
Andy, Financial-Spread-Betting: Tell us about HedgeStreet - who owns HedgeStreet? Is the company financed by venture capital, private investment, loans, or personal funds?
Ursula Burger, HedgeStreet: HedgeStreet is a privately held and financed company, and will issue announcements at its discretion from time to time.
Andy, Financial-Spread-Betting: Tell us why you decided to plunge into the binary options market?
Russell Andersson, HedgeStreet: We wanted to differentiate ourselves from other offerings in the United States by having an open platform, accessible to anybody, trading simple instruments in small sizes. Binary options by their very nature are simple to understand; they offer the ability to clearly calculate risk/reward in advance, and as such were the obvious choice for our introductory products.
Andy, Financial-Spread-Betting: Tell us about the different products on offer at HedgeStreet. Are Hedgelets in effect binaries?
Russell Andersson, HedgeStreet: Currently, HedgeStreet is offering to the public two types of products: Yes/No (Binary) Hedgelets, which offer a fixed payout of $0 or $10, and Variable Hedgelets, which offer a variable payout between $0 and $10. A Yes / No Hedgelet offers two possible positions on whether a specific outcome will occur: Yes or No. For example, Gold > $420 (08 Apr 05) , is a Yes/No Hedgelet based on the price of Gold. The two sides of the contract are: 1) Gold will be greater than $420 (the Yes side), or 2) Gold will be less than or equal to $420 (the No side). The Hedgelet reflecting the actual outcome will receive a fixed payout of $10, while the opposing Hedgelet will receive no payout ($0). Variable Hedgelets trade within a pre-defined range and result in a variable payout between $0 and $10, depending on where the underlying asset finishes in relation to the range. For example, Gold $420 to $430 (08 Apr 05) is a Variable Hedgelet based on the price of Gold. Here, the trader is speculating where Gold will settle at the end of trading (April 8, 2005). Traders can take a "long" position if they think the underlying asset will go up, or a "short" position if they think the underlying asset will go down. If Gold settles at $428, payout for the long contract is equal to: [Expiration Value of Gold ($428) - floor ($420) * dollar multiplier (1)], ($428-$420)*1 = $8. Payout for the short contract is $10 - long price, or ($10-$8) = $2.
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Andy, Financial-Spread-Betting: How do Hedgelets exactly work? Are clients able to sell Hedgelets back to you before expiry? Do you offer a demo account?
Russell Andersson, HedgeStreet: Hedgelets trade on our exchange through traditional bid and ask prices, with the market consensus determining relative pricing for each Hedgelet. Members of HedgeStreet buy and sell contracts by placing bids and offers throughout the day. When the bid price equals the ask price, the order is matched and the trade is executed. This ongoing process takes place until the last trading day for the specific Hedgelet contract. After trading has been closed, the Hedgelet's Expiration Value is established, which determines the payout amount for the Hedgelet. A daily settlement run is then performed by HedgeStreet and any due proceeds from settled Hedgelets are paid to the appropriate member accounts. It is possible to sell back Yes/No Hedgelet pairs directly to HedgeStreet and receive $10 (less a fee) before trading for the Hedgelet closes on last trading date. However, the Yes/No Hedgelets must be sold to HedgeStreet as a Pair, meaning members must own both the Yes and the No Hedgelets. It is not possible to sell a Variable Hedgelet to HedgeStreet before expiration, but a member can attempt to sell a Variable Hedgelet to another member at anytime prior to expiry. At this time, we do not offer a demo account. However, this is something that we are considering in the future in order to allow members a chance to become comfortable with the trading procedures on HedgeStreet.
Andy, Financial-Spread-Betting: What do you think are the main advantages of Hedgelets?
Russell Andersson, HedgeStreet: Hedgelets offer many advantages over traditional contracts. A primary enhancement is the limited risk involved. When compared to other traditional derivative contracts that have margin and as a result may result in losses beyond initial collateral, Hedgelets cap future losses and gains, so they are easier to risk manage. This is a critical benefit considering our initial target market is the common investor more familiar with trading equities.
Andy, Financial-Spread-Betting: Where exactly is your business located? Do you have any international offices?
Ursula Burger, HedgeStreet: HedgeStreet is located in San Mateo, CA (just south of San Francisco), and also has an office in New York. We don't have international offices yet as we just launched our market in the U.S. but are planning expansion into Europe and Asia.
Andy, Financial-Spread-Betting: What dealing platform do you use? What would you say really stand out about it?
Russell Andersson, HedgeStreet: We have developed our trading platform internally by extending licensed technology we have obtained from recognized vendors. The main factor that is unique when compared to other US based commodity exchanges is that it is completely electronic and Internet based, and in addition it has been designed and built to scale in order to serve tens of thousand of customers, where as most traditional exchanges are focused on smaller member numbers.
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Andy, Financial-Spread-Betting: Under which jurisdiction and license does HedgeStreet operate? Are the gains taxable?
Ursula Burger, HedgeStreet: HedgeStreet is a Commodity Futures Trading Commission (CFTC) designated contract market (DCM) and derivatives clearing organization (DCO), and thus operates under U.S. futures laws. Gains are taxable.
Andy, Financial-Spread-Betting: Do you accept clients from all over the world or just from the USA? Does one need a certain trading experience to open an account with you?
Ursula Burger, HedgeStreet: Members of HedgeStreet need to be legal residents of the U.S. and must maintain an account at a U.S. financial institution. Anyone who has experience trading equities online will have no problem trading on HedgeStreet. Opening an account is fast and easy, and accounts can be funded via electronic check.
Andy, Financial-Spread-Betting: Which payment methods do you accept? Do clients need to fill up a fax form to request a withdrawal? What are the fees for using the different payment systems?
Russell Andersson, HedgeStreet: To open an account, there are three methods of payment available: personal check (via the U.S. post office), electronic check or wire transfer. In requesting a withdrawal, the member can log on to their HedgeStreet account and complete the withdrawal form online. There are no fees for withdrawals. Likewise, opening an account is also free. We try to discourage wire transfers, so they do incur fees: $20 for transfers to the account and $25 for transfers from the account, with amounts greater than $10,000 being free of charge.
Andy, Financial-Spread-Betting: What is the minimum deposit required to open an account? Is there a maximum deposit? How do I get money out?
Ursula Burger, HedgeStreet: The minimum amount to open an account is $500. However, after the initial deposit, no minimum balance is required. There is no maximum. Members can get their money out by requesting a fund withdrawal from their account.
Andy, Financial-Spread-Betting: What instruments are available to trade at HedgeStreet.com?
Russell Andersson, HedgeStreet: HedgeStreet offers products encompassing many markets, including Currencies (EUR/USD, GBP/USD, USD/YEN, USD/CHF), Commodities (Gold & Silver), Interest Rates (Fed Funds Rate), Mortgage Rates (1-Yr ARM &30-Yr FRM), Housing Prices (Chicago, LA, Miami, NY, San Diego, San Francisco), Fuel (Crude Oil & Gasoline), Inflation (CPI), Economic Indicators (PMI & Retail Sales), & Employment (Nonfarm Payrolls & Initial Claims). In addition, we will continue to offer new and innovative instruments regularly.
Andy, Financial-Spread-Betting: Is interest paid on the balance of the accounts? If yes, what are the rates?
Russell Andersson, HedgeStreet: Yes, members with $1000 or more in available cash in their accounts receive interest payments at the going market rate, as determined by our settlement bank, Union Bank of California.
Andy, Financial-Spread-Betting: How do you hedge your exposure to compensate for clients' positions with regards to the products on offer? Do you take the risk yourselves or do you trade in the open markets to eliminate any excess exposure? Please expand.
Russell Andersson, HedgeStreet: As an exchange, HedgeStreet is always risk neutral so it does not incur any market exposure. Traders put on positions by trading with each other, so HedgeStreet is not taking the other side of any client transactions.
Andy, Financial-Spread-Betting: How do you make most of your money?
Russell Andersson, HedgeStreet: We generate revenue on a transactional basis from trading and settlement fees.
Andy, Financial-Spread-Betting: How do you see yourselves conquering the binary options market? What is your edge?
Russell Andersson, HedgeStreet: Our edge is our flexibility and willingness to rapidly offer new products. We actively encourage our membership base to help design and list products, and in doing so, offer to pay royalties to the originators of new products.
Andy, Financial-Spread-Betting: What happens if HedgeStreet goes bankrupt? I ring one day, the receivers are in and I've got thousand of dollars with you because I've been a consistent gainer. Am I protected? And if protected, by whom?
Ursula Burger, HedgeStreet: Member funds are held in a segregated bank account at the Union Bank of California and are therefore protected under U.S. banking regulations.
Andy, Financial-Spread-Betting: What do you think about education? Do you think people need it to be successful in binary trading?
Russell Andersson, HedgeStreet: In any investment arena being educated and having an information edge is crucial. We actively encourage customer education, and are always working on developing educational materials.
Andy, Financial-Spread-Betting: What are your unique selling points with regards to HedgeStreet? And why should our readers open an account with you?
Russell Andersson, HedgeStreet: HedgeStreet offers several key selling points. First, access is readily attainable to all those with an Internet connection, so the barriers to entry are low. This enables our second key differentiator in that we offer the ability to trade instruments in much smaller contract sizes. The net result is that we are opening up trading opportunities that were previously available only to institutional investors, or higher net worth participants, to the average investor. Thirdly, the structure of these issues enables pre-defined gains and losses for improved risk management. Finally, we are planning on listing contracts on new underlying risk that enable new types of trading strategies to be implemented.
Andy, Financial-Spread-Betting: Do you trade on a personal basis? Have you made any mistakes along the way that you have learned from? If so, would you describe them?
Russell Andersson, HedgeStreet: As an employee of HedgeStreet, I am not allowed to trade on the HedgeStreet exchange. However, I have traded in other markets and believe the lessons to be the same. The primary mistake is one of over confidence. Humans have a tendency to overestimate the potential for positive outcomes and underestimate the probability of adverse outcomes, which causes one to take on more risk than is sensible. Secondly, one should only trade when one has a clearly identified edge in any given situation, or a clearly thought out rationale for any trade, so I would advise the average trader to really wait for an exceptional opportunity that they can capitalize on, rather than trading more frequently.
Andy, Financial-Spread-Betting: How do people trade? Do they jump in and out 50 times a day or do they hold their trades for weeks?
Russell Andersson, HedgeStreet: We are seeing a wide variety of trading strategies on the HedgeStreet exchange. Because we are trading new instruments on new underlyings, the potential for innovation is very high, and we are starting to see some really innovative money making strategies being put into effect.
Andy, Financial-Spread-Betting: Are there traders who make a living through trading at HedgeStreet? What is the trading style and methods that these traders use for winning consistently?
Russell Andersson, HedgeStreet: We are not in a situation to comment on any single trader's result. The only comment that can be made is that making a full time career as a trader, either on HedgeStreet, or on any exchange is challenging, so should not be undertaken lightly.
Andy, Financial-Spread-Betting: What do you think are the most important characteristics of the professional Hedgelets' investor?
Russell Andersson, HedgeStreet: Patience, and a sense for where an asymmetrical risk reward situation exists. The big winners on HedgeStreet, and indeed on any market, are those traders that can identify situations where the risk reward of any given outcome is dramatically skewed in their favor. These situations are rare, but when they manifest themselves, great traders put on large positions to exploit them.
Andy, Financial-Spread-Betting: As of now, what trends do you see in the markets people choose to trade? Are there any sectors, contracts, currencies, indices, particular markets where your clients are clearly more or less successful? Do you think this will change over time?
Russell Andersson, HedgeStreet: We see a lot of trading and popularity in the Daily Spot Markets for Currencies, Gold, and Crude Oil. Energy is starting to become an area of focus, and we are seeing growing interest in our oil and gasoline at the pump contracts.
Andy, Financial-Spread-Betting: The last few years have seen an explosion in binary trading. Do you think it could spell the end of traditional share trading? And is the stock market feeling the pinch?
Russell Andersson, HedgeStreet: No, the trading of binaries serves a different purpose and I do not believe these products will have any meaningful effect on the demand for traditional equity trading.
Andy, Financial-Spread-Betting: There are many sayings in the markets; do you have a favorite one?
Russell Andersson, HedgeStreet: "No Riskit, No Biskit"
Andy, Financial-Spread-Betting: Any books and resources you would recommend to fellow traders? Any other comment you want to make?
Russell Andersson, HedgeStreet: I highly recommend budding traders read Fooled by Randomness by Nassim Nicholas Taleb.
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