How can the trading ecosystems surrounding indices help to foster transparency and market efficiency? S&P DJI’s Joe Nelesen and Tim Edwards explore why index liquidity matters and how the ecosystems of products tracking S&P DJI indices have evolved across equities and fixed income.
[TRANSCRIPT]
Joseph Nelesen:
A robust and active trading ecosystem can benefit asset owners and investment managers by fostering transparency, market efficiency and investor confidence. As the value of assets tracking indices continues to rise,how have equity and fixed income trading ecosystems evolved with them, and what kind of market participants are involved? Hello, I'm Joe Nelesen of S&P Dow Jones Indices, and I'm joined today by my colleague, Tim Edwards, to explore our latest analysis and research on the significance of index liquidity. Tim, thanks for joining me. So tell us about the new paper.
Tim Edwards:
Well this was joint work with a few of my colleagues, Anu Ganti, Igor Zilberman and Sue Lee, what we did at the end of last year, December 2023, all around the world, there were around 1,500 different products, financial products, which were listed on an exchange and tracking one of S&P DJI's indices. So this was in exchanges ranging from New Zealand to Chile, including Europe, Asia, et cetera, et cetera. Across those roughly 1,500 products, about 800 different indices were represented, i.e., there were many different products tracking the same index. Among those, the most common one was actually the S&P 500, where you have futures, options, ETFs, or exchange-traded funds, traded in a range of markets across time zones. And look there's been a lot of interest in the assets or aggregate investment in index-based products. What we decided to do was to take all these listed products and aggregate and report on their volumes. So it's an annual survey, it's a survey of how much trading there was in total, in all the products tied to our indices, aggregated together, and we did some analysis on things that you can draw out from that in terms of the way that people are using index-based products and the relevance of certain indices and the trading ecosystem around that to market participants around the world.
Joseph Nelesen:
So you've talked a lot about broad indices and equities, tell me a little bit about fixed income as well.
Tim Edwards:
So with the combination of S&P Dow Jones Indices and what was IHS Markit, brands like The Dow and the S&P 500 were joined by some truly globally resonant fixed income brands in the iBoxx series, particularly corporate and high yield bonds. So there are products tracking iBoxx indices that are, in the case of ETFs, frequently among the most, top 20, top 50, traded securities in the world on any given day, and I think what that essentially is a symptom of is the way that people manage risk, seek opportunity, hedge, invest basically, has changed from being a question of maybe top-level asset allocation and then individual-security selection to using tradable, liquid index-based tools that allow you to take control over where you are on the credit spectrum, where you are on the maturity spectrum, where you are on currencies and fixed income. So people are making quite active decisions about where they want to be, and the availability of listed index-based products is making that a practical reality in terms of building portfolios and evolving them over time.
Joseph Nelesen:
So why are market participants using indices?
Tim Edwards:
So there's a couple of different reasons. On a truly basic level, if you looked at say, for example, the conditions of the COVID lockdown, March of 2020, investors had a need to reposition their portfolios, to manage the risk that they were seeing, to react to the news, and index-based products, something like tied to the S&P 500 for example, is a universal common denominator. It represents the U.S. equity market. People are able to get in and get out, and let's be clear, there was very high volatility, but the way that people chose to manage risk was in these index-based products rather than the individual securities, and the reason they did that is because these common indices bring together different market participants and that helps to find a clearing price, it helps to find a vehicle or a vehicle of exchange or a way to express.
Joseph Nelesen:
So going back to the research, how do these index volumes actually help markets?
Tim Edwards:
Yeah look, it's a good question. You might think if I'm a buy-and-hold investor hypothetically, and I'm buying a low-cost index fund, why would I care if there's all this trading going on around this index, in fact, is that even possibly a worrying thing? And one thing that we sort of took care to point out in the paper were the putative benefits. So imagine 10 years ago, you decided to buy an index fund tracking the S&P 500. You waited 10 years, and then you checked in on it. Well, while you were doing that, what happened was every addition to the index, every deletion to the index, every change in the index methodology, every tick up, every tick down, every major market event, you had thousands, in fact, tens of thousands, of market participants, commentators, academics scrutinizing every change in the index, monitoring whether the index was still meeting its objective and competing for the price, to find the right price for that index all the way through. And then 10 years later, when you come out, you would have been, if it was over the past 10 years, you would have been able to hope, not depend, but hope there was also a competitive marketplace to help you get the fair price for your product when you exited it. So it may not have mattered to you specifically, but that scrutiny can give confidence to investors on what's happening with their product, how it will perform and whether or not they'll be able to get out of it at a price that makes sense for them.
Joseph Nelesen:
I think that's a great point around the scrutiny and the lens that can be seen through indices. Thank you, Tim. To learn more, including the findings of our latest paper, The Liquidity Landscape: Trading Linked to S&P DJI Indices, visit us at the link below.
