Hedging for Small Investors

While Anderson says the site/exchange aspires to be "more about managing the economic risks of your daily life" than short-term trading or speculating, HedgeWorld will need to gather a sufficient amount of the latter to accommodate the former. One unique approach it is taking to achieve this goal is to welcome investors to create new contracts, for which they will be paid a royalty. Because it has no legacy system, it should be able to create and begin trading new contracts in a very short time period.

HedgeStreet is also accepting applications, which consist of a very short and simple form, for would-be market-makers. For those who think they are adept at managing risk or finding inefficiencies in markets, this might provide a great proving ground for testing one's market-making prowess.

In this sense, HedgeStreet really does represent the trend of democratizing the financial markets. While I doubt it is going to replace the existing exchanges anytime soon, it is the next step in using technology to level the playing field and let anyone who is willing to assume the risk have a fair chance at reaping the benefits offered by an open and competitive price-discovery market.

Anderson points out that residential real estate "has about five times the embedded risk of the equity market on a notional value" and presents a huge opportunity for both owners and lenders and presumably HedgeStreet. But the fact is, with the current contract size of just $10, which they call "hedgelets," and minimal trading activity, it's hard to see how an individual is going to be "hedging" the interest rate risk on an $800,000 adjustable-rate mortgage.

Anderson acknowledges that initially most of the activity will be of a strictly speculative nature, but he notes that the site can be used as a predictive tool.

"It does not take many settled prices or completed transactions to begin to get an accurate market price," he says. Anderson estimates that 15 to 20 transactions are all that are needed to begin to draw reasonable conclusions about future price expectations.