What is HedgeStreet?

Matt Brady
Matt Brady
Man climbing a rope
Man climbing a rope

HedgeStreet was a pioneering company in the derivatives exchange market, becoming the first online futures exchange to be officially approved and regulated by the United States (U.S.) government via the Commodities Futures Trading Commission (CFTC). It also opened up the futures market to smaller investors, offering smaller contracts for trade with a fraction of the cost and risk of traditional futures transactions. HedgeStreet was founded in 2004, and bought out by IG Group in 2007. In June 2009 the company changed its name to the North American Derivatives Exchange (NADEX).

Company founder John Nafeh came up with the idea for HedgeStreet in an effort make the futures market more accessible to the average "main street" investor. He thought this could be done by dividing up larger derivative contracts into smaller pieces, thus making them more affordable to small investors. Nafeh coined the term "hedgelet" to describe these fractional contracts. The word "hedgelet" is rooted in the word "hedge," which is used to describe the practice of using futures contracts as a kind of insurance against other investments. These hedgelets come either in the form of binary options or capped futures.

In October 2004, HedgeStreet was officially approved for regulation by the CFTC, something that an online futures market had never successfully done before. Also for the first time, derivatives contracts that speculated on economic goods and events were offered to investors for a fraction of their normal price. These smaller contracts offered a lower payout in exchange for lower risk and upfront investment.

HedgeStreet got significant financial backing in 2006 when two companies, the Chicago Board Options Exchange and Norwest Venture Partners, each bought a stake in the company. In 2007, the company continued to grow, with a steadily increasing number of investors using the exchange service as well as with the buyout of HedgeStreet by IG Group. In 2009, IG Group decided to put a different name and face on the company, calling it NADEX.

Binary options offered through NADEX are yes-or-no contracts that operate on an all-or-nothing payout basis. Using NADEX, someone could purchase a contract that bet the price of gas would exceed a certain price per barrel within a certain range of time. If within that time period the investor proved correct, then they would receive a flat payout. If they were not correct, they would lose only the small amount of money that the contract was purchased for. Capped futures are similar in that the investor is also speculating that the price of an economic good will rise or fall. The potential payout and loss of capped futures may be somewhat greater than binary options, but the overall risk is still not that significant considering NADEX's small contracts.

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