An Introduction

1
An Introduction
2
An Enormous Need

• Most major economic risks faced by individuals
  and organizations cannot be efficiently traded
• One example is the value of real estate holdings
  --- given that a typical American familys
  largest asset is its house
• Current financial markets are inadequate to deal
  with risk
• Stock markets Claims on corporate profits
• Futures markets Narrow range of instruments
• The insurance industry Limited policies

• Risk instruments are available to only a
  sophisticated few
• OTC desks within large investment banks
• The fragmented re-insurance market

3
The Market

• The nominal value of over-the-counter
  derivatives now exceeds 100 trillion, 60 of
  which is handled by a mere six dealers, including
  J.P.Morgan and Citi Group.
• The Economist, May 18th, 2002
• "When trading volume concentration reaches
  these kinds of levels, market participants need
  to consider the implications of exit by one or
  more leading dealers."
• Alan Greenspan, 2003
• The global volume in over-the-counter (OTC)
  derivatives in interest rates, currencies,
  equities and credit derivatives totaled 149
  trillion for 2003.
• The semi-annual survey by the ISDA
• Worldwide trading volume in futures and options
  on all derivatives exchanges rose sharply in 2003
  to 874 trillion.
• Bank for International Settlements

4

HedgeStreet? Market

• HedgeStreet offers the first trading platform on
  which the established derivatives marketplace can
  join with millions of other members to directly
  trade a wide variety of risks with each other -
  risks that currently cannot be efficiently hedged
  through existing securities, commodities or
  insurance markets
• HedgeStreet extends the depth, variety, and
  number of
• derivatives that are tradable
• HedgeStreet extends derivatives trading to retail
  traders

5
Market Validation Retail

• Retail trade holds huge, huge potential. And
  even if we only captured
• 10 or 20 percent of retail, it would be very
  meaningful in the growth of
• our marketplace Korea it created a very small
  index, and it trades
• more than any other product in the world.
• -- Leo Melamed, former Chairman of the CME

• Korean Example of Success Kospi 200 Index
• Small retail oriented index
• Fastest growing index in the world
• 15x larger that Nikkei 225
• 3x larger than SP 500
• 66 of traders have been retail traders

6
The Hedge Fund Opportunity

• There have been an explosion of new market
  participants
• (9000 Hedge Funds, 30 growth rates, controlling
  1 trillion in aggressive capital)
• They are running out of trading opportunities
• (fixed income arb, convertible bond arb crowded
  out)
• They need new products to allow them to develop
  new strategies
• The need new products to enable them to take new
  and unique views and generate alpha
• They are a good target market
• (information centric, easy to locate, leveraged
  and aggressive, nimble, well capitalized, hungry,
  pay 30 of all i-banks commissions business)

7
Revenue Model
Exchange Members
Individuals
Institutions
Corporations
Aggregation of Trading Volume Revenues
Third-Party New Instruments
HedgeStreet New Instruments
HedgeStreet Exchange
8
Going To Market Strategy

• Target financially aware retail customers and
  general retail customers at large (retail
  channel)
• List products of interest
• Channel partners - related markets
• Target institutional partnerships (institutional
  channel)
• Listing partners
• Market makers