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March 01, 2006 at 07:00 PM
CHICAGO (HedgeWorld.com)–HedgeStreet Inc., purveyor of futures and binary options called Hedgelets, is getting a major infusion of capital and credibility thanks to a new joint venture with the Chicago Board Options Exchange.
As part of the deal, announced today [Feb. 22], the CBOE will make a seven-figure equity investment in HedgeStreet, provide the company with access to its technology services and help with marketing and support of the Hedgelet products. Additionally, HedgeStreet will get increased visibility via a link on the CBOE’s popular web site, and access to the deep liquidity of the exchange’s market makers.
In return, the CBOE instantly becomes a player in what it believes is a growing area of the derivatives world: binary options. Such contracts have two possible outcomes, either they finish in the money or out of the money. They are sometimes referred to as “yes or no” or “cash-or-nothing” options. CBOE also will tap into HedgeStreet’s order matching technology, which HedgeStreet officials say has nearly boundless capacity.
In addition to the binary options, HedgeStreet also offers futures Hedgelets, which allow traders to take positions on market directions and which have sliding payoffs based on how much the market moves. As part of the agreement, the CBOE and HedgeStreet will work together on retail distribution of all its Hedgelets through joint marketing initiatives. They will also share technology and hosting facilities.
“We believe the products HedgeStreet offers are the avant garde of financial products,” said William J. Brodsky, chairman and chief executive of the CBOE, at a news conference.
John Nafeh, chairman and co-founder of HedgeStreet, said the bottom line of the new partnership is increasing the number of asset classes listed on HedgeStreet, expanding the number and variety of derivatives being traded and providing millions of retail customers access to those derivatives.
He said HedgeStreet, which closed about a million contracts last year in its first year of operation, could have grown on its own, but partnering with the CBOE will rapidly speed up the process.
CBOE will host HedgeStreet’s trading system, opening it instantly to a new and larger audience. Likewise, HedgeStreet will list CBOE products on its system. Together the two will work to develop new products.
Steven Race, HedgeStreet’s recently-hired chief executive, said his firm gets an additional benefit right away: “There is also a legitimacy. CBOE brings an implied endorsement [for HedgeStreet].”
Patrick Fay, managing director of the CBOE Futures Exchange, said the CBOE’s product development committee identified binary options as the next wave in financial products. “We believe it has great promise,” he said. “This is a business we had to get into.”
And while the CBOE could have built its own platform, it seemed more practical to partner with a firm that was already well along the development path.
