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to market risk. Thus, Merit would find a willing party to take the
opposite position for every position it sold or purchased. Merit
employees, as well as others recruited by Merit, functioned as
market makers who would accept positions offered by non-market-
maker customers of Merit. These market makers took "assignments"
of stock from other non-market-maker customers. Often these
parties were subsidiaries, such as Omni and Horizon, controlled by
Dr. Richartz.
Although it ostensibly offered open positions in stock
forwards, Merit traded only in spreads or combinations of spreads.
In a stock forwards spread position, an investor would purchase
both a long contract to purchase stock from Merit at a future date
and specified price together with an equivalent short contract to
sell the same stock to Merit at another future date and specified
price.
A combination spread involved two spreads in different stock.
Typically in one of the spreads, the long position matures before
the short, while in the other spread, the short position matures
first. A combination spread in stock forwards in two different
stocks operates as a hedge against adverse market moves.
Differences between the relative performances of each of the
spreads have an economic effect.
Merit issued a PPM for its stock forwards program, advising
that the holder of a stock forwards position had three options for
acting with respect to that position: (1) The investor could hold
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