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Derivative provides way around shorting ban
2008-09-29
News
A derivative called the Clipper provides an antidote to the regulatory barriers to shorting, as well as eliminating all counterparty risk. Piloted for 10 months with institutional traders, the over-the-counter (OTC) contract is based on long or short positions on any type of asset — equities, commodities, foreign exchange and debt.
The Clipper enables traders to control risk, highly leverage capital and significantly reduce or eliminate counterparty risk. Counterparties take opposite positions on the projected price movement within a limited time horizon. There is no exposure to the full cost of the underlying asset, so use of capital is small. The potential gains, however, are the same as options or futures. These are cash-settled contracts conducted anonymously on an automated facility.
The Clipper is a ‘standard manufacture’ derivative that structurally caps a gain or loss from an underlying asset to a ‘clip limit’ amount. Whether the trader initiates the short or long side, the trade is automatically filled on a dark-pool exchange.
A range of intraday (quarter-hour and hourly) overnight, weekly and monthly expirations make Clippers appropriate for almost every trading style or strategy.
For example, an overnight 10-cent Clipper on 100,000 shares of a $20 stock risks a maximum of $10,000 for the buyer and seller. In contrast, an outright purchase of the stock would risk up to $2 million, making the capital leverage in this example 20:1.
The leverage increases with more expensive underlying assets. With no sale or purchase of underlyings involved, there is no impact on underlying market prices.
Cash-based Clippers have no counterparty risk. Margins equal to the clip limit are deducted from the cash account of each counterparty at the start of the trade, and cash settled on expiration. Execution is anonymous and trading costs are lower than any comparable market.
Clippers are traded, settled and bilaterally-cleared exclusively on the Everest OTC trading facility. Trading is limited to eligible contract participants. Traders must have $1 million or more in trading assets under management in a corporation or partnership.
"Clippers are the most important financial innovation in 25 years," said Alger ‘Duke’ Chapman, former chairman and CEO of the Chicago Board Options Exchange, now chairman of the advisory board of Actuarials Holdings, ‘because they provide unparalleled capital efficiency to speculators, hedgers and arbitrageurs."
"By removing tail risks, Clippers provide a stable way to earn consistent profits. Excess volatility in trade P/L is completely eliminated," said Adam Burczyk, founder and CEO of Actuarial Holdings.
Brian Zwerner, principal of Kensington Blake Capital of Atlanta, is one of the initial users (and testers) of Clippers. "I use Clippers to tactically tilt my portfolio on a short-term basis, when it's not attractive to unwind a position. I like that I can take a relatively large position with a limited downside, and that I don't have to watch it every minute," he said.
Actuarials Holdings, headquartered in Chicago, provides qualified traders and financial intermediaries with capital markets and derivatives instruments.
2008-09-29
News
A derivative called the Clipper provides an antidote to the regulatory barriers to shorting, as well as eliminating all counterparty risk. Piloted for 10 months with institutional traders, the over-the-counter (OTC) contract is based on long or short positions on any type of asset — equities, commodities, foreign exchange and debt.
The Clipper enables traders to control risk, highly leverage capital and significantly reduce or eliminate counterparty risk. Counterparties take opposite positions on the projected price movement within a limited time horizon. There is no exposure to the full cost of the underlying asset, so use of capital is small. The potential gains, however, are the same as options or futures. These are cash-settled contracts conducted anonymously on an automated facility.
The Clipper is a ‘standard manufacture’ derivative that structurally caps a gain or loss from an underlying asset to a ‘clip limit’ amount. Whether the trader initiates the short or long side, the trade is automatically filled on a dark-pool exchange.
A range of intraday (quarter-hour and hourly) overnight, weekly and monthly expirations make Clippers appropriate for almost every trading style or strategy.
For example, an overnight 10-cent Clipper on 100,000 shares of a $20 stock risks a maximum of $10,000 for the buyer and seller. In contrast, an outright purchase of the stock would risk up to $2 million, making the capital leverage in this example 20:1.
The leverage increases with more expensive underlying assets. With no sale or purchase of underlyings involved, there is no impact on underlying market prices.
Cash-based Clippers have no counterparty risk. Margins equal to the clip limit are deducted from the cash account of each counterparty at the start of the trade, and cash settled on expiration. Execution is anonymous and trading costs are lower than any comparable market.
Clippers are traded, settled and bilaterally-cleared exclusively on the Everest OTC trading facility. Trading is limited to eligible contract participants. Traders must have $1 million or more in trading assets under management in a corporation or partnership.
"Clippers are the most important financial innovation in 25 years," said Alger ‘Duke’ Chapman, former chairman and CEO of the Chicago Board Options Exchange, now chairman of the advisory board of Actuarials Holdings, ‘because they provide unparalleled capital efficiency to speculators, hedgers and arbitrageurs."
"By removing tail risks, Clippers provide a stable way to earn consistent profits. Excess volatility in trade P/L is completely eliminated," said Adam Burczyk, founder and CEO of Actuarial Holdings.
Brian Zwerner, principal of Kensington Blake Capital of Atlanta, is one of the initial users (and testers) of Clippers. "I use Clippers to tactically tilt my portfolio on a short-term basis, when it's not attractive to unwind a position. I like that I can take a relatively large position with a limited downside, and that I don't have to watch it every minute," he said.
Actuarials Holdings, headquartered in Chicago, provides qualified traders and financial intermediaries with capital markets and derivatives instruments.
