Equity Trading Capacity Revisited

Abstract

Equity futures and options have been traded for a quarter of a century on organized exchanges; a well-developed and rapidly growing over the counter (OTC) market exists for swaps and options with competitive market-making by global investment and commercial banks. The trading of portfolios of stocks is low-cost and growing — now regularly representing 30–40% of New York Stock Exchange (NYSE) share volume — facilitated by the ability to hedge equity risk using derivatives. In the short span of just five years, exchange-traded funds (ETFs) have become prominent hybrid vehicles used for both trading and investment purposes by individual, institutional, and hedge fund investors. (ETF $ volume traded now represents just 30% of the NYSE volume compared to 9% five years ago.) In this article, we explore some trends and issues in cross-product equity market capacity.