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For most financial instruments we can go long or short and make a bet on the price. In the case of options we can bet on derivatives of price and other factors (e.g., interest rates).

Is there an instrument or a strategy that can benefit from changes in trading volume, besides buying and selling equity in an exchange?

Tal Fishman
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icequations
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    Hi iceequations, welcome to quant.SE. Interesting question, I've never heard of any such instruments, but perhaps others here know better. Be patient and see what comes up. – Tal Fishman Oct 24 '11 at 14:06

2 Answers2

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No, there isn't, there is no valuation model where volume plays a role, thus you can't make money from volume.

But you can buy NYSE-Euronext stocks, they will benefit from increased volume in the owned exchanges, that is if you hedge everything else that could make NYSE-Euronext stocks move.

Lliane
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  • I agree,for the sake of discussion, how would something like that be achieved on an intra-day basis? – icequations Oct 24 '11 at 14:16
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    There is a strong correlation between the volume traded and the results of NYSE-Euronext for example (or the Hong Kong Stock Exchange for volume in HK), but you'll see that in their results every three months, definitely not intraday. – Lliane Oct 24 '11 at 14:44
  • How did you come up with conclusion, that NYSE-Euronext stocks have strong correlation with price move? It is possible to forecast the volume - auto correlation, intra- day volume and etc. Does that means, that price movements can be foreseen based on this forecast? – Dzidas Oct 26 '11 at 15:12
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I can think of at least two problems with such a security, should one be devised:

  1. It is probably unhedgeable. That means if you go long this contract, the market-maker is short unless he can hedge that risk away somehow (or sell it to someone else).
  2. Unless it is on something large like the volume traded on the NYSE in one day, such a contract may be prone to manipulation. Suppose I buy such a contract on APPL and it gets close to hitting the strike on the contract. I could send a large block order to push it over the top. It's harder to do against the entire market, but with derivatives, it may be possible.

But if, somehow, should such a contract ever be devised, brokers, who are naturally long volume (due to the positive correlation with commissions), may be interested in selling time premium to hedges some of their risk.

kfmfe04
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  • Manipulation like this? http://www.cnbc.com/2015/04/21/futures-trader-charged-for-manipulating-stock-market-contributing-to-2010-flash-crash.html – BCLC Dec 16 '15 at 22:12