Template:Equity giveup

Under a cash equity give-up, the hedge fund seeks a firm price indication for a cash equity from an executing broker, but does not act on it: rather, the hedge fund says, “all right, sir: hold that thought”, and runs off to its favourite prime broker, whom it instructs to enter into a swap at the exact price quoted by the executing broker, directing the PB’s attention to the winsome executing broker who is sitting by the phone, dutifully holding its thought, all dressed up and with nowhere yet to go.

In practice, the executing broker is not quite that demure. It will pre-emptively “allege” the cash trade to the hedge fund’s prime broker, which is rather like buzzing in on University Challenge before Bamber Gascoigne has finished asking the question: “a little birdie tells me you are going to instruct me to trade on an equity to hedge an equity swap you’re about to put on with your client hedge fund X. Well — here it is!”).

Once the PB has accepted the EB’ “allegation”, the PB prints the trade with the Hedge fund, usually in the form of an synthetic equity swap transacted under an ISDA Master Agreement.

Calling this a “give-up” is a misnomer, since nothing is actually “given up”. In theory — even if not awfully often in practice — the prime broker can feign ignorance and refuse to transact with the executing broker, thereby hanging the executing broker out to dry with any recourse against anyone for the equity trade it has executed.

The executing broker may have stern words to the hedge fund about this, but not ones that would sound in damages: the entire theory of thire arrangement (relevant for Stamp Duty purposes) is that the hedge fund never committed to any trade with the executing broker. All care, no responsibility.