Equity markets are fundamentally different from other markets. In particular, equity markets tend to be highly structured and organized around exchanges, while most markets—even most financial markets—are not. Most goods and services trade quite nicely in decentralized, over-the counter markets. For example, we would not think of hiring a broker to send an order for paper clips to the New York Paper Clip Exchange. Instead, we would just call our local office supply store. Even most financial products trade without heavily structured and regulated exchanges. Currencies, bonds, loans, and many derivative markets thrive without centralized exchanges.
This difference between Equity Tips markets and other markets is driven by information. It is relatively easy to price most goods and services and even most financial products. The price of paper clips does not fluctuate much, and it is pretty easy for customers to know if they got a good price. Bonds are similar. If we know the term structure of interest rates and current yield spreads, we can price most bonds. Knowing the spot price of an asset and an estimate of volatility leads to accurate pricing of most derivatives.
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