Asset classes: who trades what, and why it is structured that way
MKT · Chapter 112 min readAsked at Optiver, IMC, Jane Street, DRW
After this lesson you should be able to
- Say what distinguishes each asset class as a trading problem.
- Explain why some markets are exchange-traded and others are not.
- Name the participants whose forced flow creates opportunity.
Every asset class is a different trading problem, and the differences are structural rather than cosmetic. How fungible the instrument is, who is forced to trade it and whether it clears on an exchange determine the spread, the participants and where a market maker can earn anything.
| Class | What makes it distinctive | Where the flow comes from |
|---|---|---|
| Equities | Highly fungible, exchange-traded, tight ticks | Retail, index funds, corporate actions |
| Futures | Standardised, margined daily, deep | Hedgers and everyone using them as a proxy |
| Rates | Enormous, dealer-intermediated, curve-structured | Central banks, issuance, liability hedging |
| FX | Continuous, no central exchange, very deep in the majors | Trade, reserves, hedging, carry |
| Commodities | Physical delivery, storage, seasonality | Producers and consumers hedging real exposure |
| Credit | Each bond is its own instrument; thin and lumpy | Issuance, index rebalances, forced selling on downgrade |
| Crypto | Fragmented venues, 24/7, retail-dominated | Speculation, and structurally wide spreads |
Fungibility decides almost everything. A share of a company is identical to every other share, so all the liquidity in the name concentrates into one order book and the spread collapses to a tick. A corporate bond is one of dozens of instruments from the same issuer, differing by maturity and coupon, so the same total interest is split forty ways and no single book is deep. That one fact — how many distinct instruments the demand is spread across — predicts the spread, the venue structure and whether the market is quoted electronically or by a dealer on the phone.
| Aspect | Exchange-traded | Over-the-counter |
|---|---|---|
| Instruments | Standardised | Negotiated, often bespoke |
| Counterparty risk | Taken by the clearing house | Bilateral, collateralised |
| Price discovery | Public order book | Requests for quote; less visible |
| Typical classes | Equities, futures, listed options | Rates swaps, credit, FX forwards, exotics |
| Where the edge is | Speed and queue position | Relationships, balance sheet and pricing capability |
Proposition 1.3
Follow the forced flow
The most reliable opportunities come from participants who must trade regardless of price: an index fund rebalancing, a pension fund matching liabilities, a producer hedging a harvest, a fund selling a downgraded bond it is not permitted to hold. Being on the other side of a price-insensitive counterparty is the clearest form of liquidity provision there is.
Holds when
- Forced flow is usually dated and public, so the compensation is competed down to the cost of providing it.
- The corollary is that the profitable side of an opportunistic counterparty is a much harder place to be.
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