Wed, 01/10/2008 - 07:01
Chicago-based Actuarials Holdings, parent company of the Everest OTC Trade Facility and the AE Clearinghouse, has unveiled what it says is a revolutionary 'safe' derivative called the Clipper that enables traders to control total risk, highly leverage their capital, and eliminate counterparty risk.
Actuarials Holdings says Clippers have been tested by institutional investors in hundreds of thousands of trades during a 10-month pilot period and represents an answer to the turbulent market conditions faced by traders today.
'Clippers are the most important financial innovation in 25 years,' says Alger Chapman, chairman of the advisory board of Actuarials Holdings and former chairman and chief executive of the Chicago Board Options Exchange.
'Not just because they are crash-proof, but because they provide unparalleled capital efficiency to speculators, hedgers, and arbitrageurs. If we had Clippers in the meltdown of 1987, many traders who went bankrupt would have been saved.'
The Clipper is a so-called 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 in a dark-pool exchange. Actuarials Holdings says a range of intraday (at every quarter-hour and hour), overnight, weekly and monthly expirations make Clippers appropriate for almost every trading style or strategy.
According to the firm, an overnight 10-cent Clipper on 100,000 shares of a USD20 stock risks a maximum of USD10,000 for the buyer and seller, compared with USD2m for the outright purchase of the stock. The leverage increases with more expensive underlying assets. With no sale or purchase of underlying assets involved, Actuarials Holdings says, Clippers cause no impact on underlying market prices.
The firm adds that Clippers have no counterparty risk because margins equal to the clip-limit amount are deducted from the cash account of each counterparty at the start of the trade and cash-settled upon expiration. Execution is anonymous and trading costs are lower than in comparable markets, it adds.
'With Clippers, traders get the full opportunity to pick up targeted returns with every execution,' says Actuarial Holdings founder and chief executive Adam Burczyk. 'By removing tail risks, Clippers provide a stable way to earn consistent profits, and excess volatility in trade P/L is completely eliminated.'
Actuarial Holdings says traders who have used the derivative are extremely enthusiastic about it. 'We made our first Clipper trade in January, and by June we saw so much potential that we dropped equities altogether,' says Matt Mills, principal of Pinnacle Equities Management, an independent proprietary trading firm in Vancouver. 'Whatever your risk model, Clipper offers a matrix of opportunities that's completely different from the linear model of options.'
Brian Zwerner, principal of Kensington Blake Capital of Atlanta, says: '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.'
Keith Coppola, vice-president of New Jersey-based proprietary day-trading shop CT Trades adds: 'A Clipper is as good as your own ideas, in fact better because it gives the trader more staying power. It's an easy learn for younger traders, and a lot less risk because you choose your exposure.'
Clippers are traded, settled and bilaterally cleared exclusively on the Everest OTC trading facility. Trading is limited to eligible contract participants that have USD1m or more in trading assets under management in a corporation or partnership.
Headquartered in Chicago, Actuarials Holdings operates a vertically-integrated execution and bilateral clearing agency, featuring straight-through processing from order inception to settlement, including custodial management of deposited funds.
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