A drop in the bucket: Indexing's share of US trading activity
27 June 2019 | Markets and Economy
Indexing strategies are in demand. It's no surprise given their benefits of low cost, diversification and ease of access. But despite their success, concerns remain about their potential negative impact on capital markets.
One of the common arguments asserts that growth in indexing assets impairs market pricing dynamics. Either it has too large an influence on prices or it inhibits price discovery because it lowers aggregate market trading volume.
Seasoned market participants quote 5% to 7% as widely adopted estimates of US trading volume due to the portfolio management activity of indexing strategies. In our paper, we use a detailed methodology to improve this estimate. The paper reveals our new figure, and our findings help dismantle the notion that the growth in indexing hampers markets.
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