Template:Equity giveup capsule

When a hedge fund wishes to obtain synthetic equity exposure to a Share from its prime broker, it may sometimes source the hedge for that swap from a different executing broker who will “give up” the order as follows:

1. HF seeks a firm quotation for a Share (i.e. the underlier of the desired Equity Swap, not the swap itself) from the EB (tacitly on the basis any resulting trade will be given up to a known PB). At this stage, there is no actual order: all is .
2. EB makes price discovery by actually executing a market trade in the Share for its own account (i.e., as a market-maker, not a broker per se) and communicates that price plus commission (P) to HF as a firm offer.
3. HF says, “Thanks, EB. You will be hearing from my prime broker”.
4. (Simultaneously)
   1. To save waiting by the phone, EB pre-emptively alleges the Share trade to PB, (tacitly, “I think you will need this as a hedge for a forthcoming swap order from HF”).
   2. In due course HF places an order for equity swap to PB instructing PB to execute at P.
5. PB accepts EB’s cash equity allegation (where it breaches limits PB could DK the trade but usually would not: easier just take the trade, unwind it and pass on any gain or loss to HF) and fills HF’s swap order at P.
6. PB rehypothecates its Share hedge into the triparty system (via its own long box) against cash which it uses to reduce its borrowing from treasury.

Resulting position: EB is out of the picture, there is an synthetic equity swap between PB and HF, PB is hedged with a physical Share which it has financed in the triparty stock lending market. Easy.