The Index ETF Perps for Small-Cap Stocks: A Breakthrough Path for Small Exchanges and Perp DEX

In August 2026, the average daily trading volume of Hang Seng Tech Index futures on the Hong Kong Stock Exchange reached 154,986 contracts, while the total average daily trading volume of all individual stock futures was 4,385 contracts. This presents a product pattern: a thematic index can become a more active trading entry point than a batch of individual stock futures.

For Perp DEX (or smaller CEX), the most tempting competition is to create an ever-lengthening list of trading pairs. By listing more targets, offering higher leverage, and using subsidies to boost trading volume, the result is often that users come quickly but leave just as fast: because they are trading the same thing, funds will flow to where costs are lower and liquidity is deeper.

Small-cap stocks provide a first-mover window for protocols. Companies not yet covered by large exchanges can become starting points for research and trading. However, exclusive listings are hard to maintain as a long-term advantage. Once a target gains attention, larger platforms will follow, and the protocol will need to find the next stock. Over time, the protocol and small exchanges end up doing the work of discovering targets, only to hand them over to larger exchanges, effectively becoming their laborers.

So how can this deadlock be broken?

1. Concentrate Attention and Liquidity

The core argument of this article is to create perpetual contracts for small-cap stock indices (or portfolios). Here, we are not referring to existing ETFs, but to a market of ETF-like contracts built by the protocol itself. First, establish a market with individual stocks, then organize the risks and returns of related companies into directly tradable industry exposures. Individual stocks bring initial attention, while the index connects these interests into broader trading demands, allowing the protocol to move from discovering stocks to defining a market.

Individual stocks allow users to choose companies, while indices enable users to trade views on entire industries.

Many people have judgments about an industry but lack the ability to continuously track every company within it. Being optimistic about a direction and selecting the right stock involves research, comparison, and position management. By only providing individual stocks, the protocol leaves all this work to the users and blocks some funds that would otherwise be willing to participate.

The index shortens this distance. Users can express their views on the entire industry without having to first identify the industry's winners. Industry growth, interest rate changes, capital expenditures, and the performance of small-cap stocks relative to large-cap stocks can all serve as reasons for trading. Judgments that previously did not apply to any specific stock now have a tool for execution.

This expands the product's audience. Orders received by the index can come from industry investors, macro traders, and portfolio managers beyond individual stock researchers. The size of the companies can be small, but the trading demand around the entire portfolio can be large.

Here, we borrow from the ETF model, transforming a basket of assets into a trading entry point. The perpetual index provides exposure to portfolio prices without requiring the protocol to first acquire the underlying stocks or issue a fund. Users trade the rise and fall of contracts, while the protocol is responsible for organizing this market.

Small-cap stocks are particularly worthy of this approach. Research and attention dispersed across different companies, especially with the liquidity of small-cap stocks being concerning, make it difficult for each to support a continuously active market. The index gives these companies a common industry label, allowing users who only care about one company to see the entire industry, and also providing a clear trading entry for those who only care about the industry. Events related to individual stocks bring attention to the index, and the index's dissemination brings users back to the constituent stocks.

This path is supported by real trading volumes in mature markets. CME reports that by the end of May 2024, the average daily trading volume of E-mini Russell 2000 small-cap index futures was approximately 225,000 contracts, corresponding to about $22.5 billion in nominal trading. During the same period, Micro Russell 2000 futures had an average daily trading volume of about 90,000 contracts, with a nominal trading volume of approximately $880 million. This indicates that while small-cap stocks may be small, when combined, they can support a considerable overall risk trading volume.

2. Insufficient Liquidity for One Small-Cap Stock? What About a Group of Small-Cap Stocks?

The index expands the trading population and changes the way funds take on risks.

The difficulty in making markets for small-cap stocks is partly due to information asymmetry and partly due to insufficient liquidity depth. Counterparties may have a better understanding of a company's orders, finances, or sudden events than market makers. To cover this risk, market makers will raise quotes to compensate, reducing the positions they are willing to take on.

Once stocks enter a portfolio, the impact of news about a single company on the entire product is diluted by weight, and the unique risks of each company can partially offset each other. Market makers can manage risks in a portfolio manner, and investors' reliance on information about individual companies decreases. Companies within the same industry will be subject to common shocks, but the success or failure of one company has a smaller impact on the entire product.

A study by Small, Wansley, and Hood published in 2012 compared ETFs with matched individual stock samples and found that ETFs have lower adverse selection costs, with dollar quote depth reaching 35 times that of matched stock samples. The study also found that ETFs have higher quote spreads and effective spreads; when combining spreads and depth for measurement, ETFs exhibit stronger overall liquidity. This historical sample supports the notion that a bundled index or portfolio can improve the capacity to absorb individual stocks.

This is also something to consider beyond trading volume: when a large order comes in, how much can the market absorb, and how far do prices need to move? Active trading and ease of capital entry and exit are two metrics that need to be validated separately.

3. The Magic of Trading Volume

Here is an often-overlooked detail: portfolio products can form an independent trading layer. An index trade does not require all underlying stocks to be executed simultaneously. Buyers and sellers can directly exchange the same type of portfolio exposure; market makers receiving opposite customer orders can offset part of their inventory risk and then handle the remaining exposure. The underlying market bears the trading pressure that needs to be transmitted, rather than every gross transaction in the portfolio market.

A study published by BIS in March 2018 pointed out that the vast majority of ETF trading occurs in the secondary market, with share subscriptions and redemptions being relatively infrequent. The turnover among investors does not translate into underlying securities trading on a one-to-one basis. As of September 25, 2026, the IWM tracking the Russell 2000 held 1,986 assets, with an average daily trading volume of about 22.4 million shares over the past 30 days. These transactions reflect investors' turnover of the entire portfolio without needing to break each transaction into nearly two thousand stock trades.

The perpetual index can similarly complete long and short matching at the contract level without requiring the protocol to buy stocks one by one. Unlike ETFs, which have price constraints based on share subscriptions and redemptions, it has a similar market structure advantage: the same type of portfolio risk can be repeatedly transferred within a unified product. Market makers manage net inventory, traders exchange exposures, and thus the portfolio has the opportunity to form its own liquidity.

Underlying liquidity limits the cost of net risk transfer and the ability to absorb orders when imbalances occur, and does not mechanically set an equal cap on the index's daily trading volume. In thin external markets, market makers need to manage exposures more cautiously; however, this is different from requiring every index turnover to consume an equal scale of underlying transactions.

The changes brought by the index go beyond customer acquisition. When only individual stocks are involved, traders primarily establish positions based on the rise and fall of companies. After adding the index, there is an additional set of tradable relationships between individual stocks and industries. Users can retain their judgments about companies while adjusting industry risks; they can also switch between industry exposure and individual stock exposure. Funds that previously needed to exit to reduce risk now have reasons to continue holding.

The trading volume brought by portfolio management is also evident. CME reports that on the rebalancing day of the Russell Index on June 27, 2025, E-mini Russell futures traded about 237,000 contracts, 37% higher than the average daily level for that week, while Micro contracts were also up 16%. This aligns with investors' needs to adjust their portfolios: indices are not only used to judge rises and falls but also to manage positions.

Many people forget: rises and falls can bring transactions, while industry differentiation and position adjustments can also lead to transactions. Therefore, the protocol has the opportunity to reduce reliance on the popularity of a single stock, turning one-time market attention into a product that can be reused.

Professional funds will enter from another direction. The index and constituent stocks each absorb orders, leading to price and funding cost differences. Managing these differences requires establishing trades between the index and individual stocks. Orders from industry users thus have the opportunity to bring out hedging demands, and positions in the individual stock market can, in turn, generate index demand. Spread trading bears execution and position risks, but it adds participants beyond directional speculation to the market.

This trading relationship around the index can also grow independently. CME data shows that the average daily trading volume of Russell 2000 closing basis trades increased from about 3,800 contracts in 2022 to over 5,000 contracts in 2023, a growth of about 31%. Traders use these tools to manage the relationship between futures and index closing prices. The inspiration for Perp DEX and small exchanges is to provide professional funds with a set of trading relationships worth sustaining beyond directional trading.

The value of portfolio/index products lies in generating more trading relationships from the same group of assets.

4. The Flywheel Model for Small-Cap Stocks

The flywheel must start with a clear theme. The protocol first selects an industry worth continuous research, aligning the individual stock market, index products, research content, and market-making resources on the same line. Stock selection considers industry relevance and tradability, and index rules are disclosed in advance, with the team continuously managing this group of assets. The most important thing to avoid in the initial stage is chasing a new hot spot every week, dispersing customers and liquidity across unrelated markets.

The first circle is to convert individual stock attention into index demand. Individual stock pages connect to their respective indices, displaying weights and contributions to rises and falls; index pages combine constituents, industry research, and trading together. Users coming in from company news can follow through to see the entire industry; those entering from industry research also have direct tools to express their views. Every piece of content shared accumulates users for the same thematic market.

The second circle is to generate repeated trading demand from positions. The performance of individual stocks relative to the index, the industry concentration of the portfolio, and the adjusted exposure should all be viewable in one place. Portfolio quotes and multi-leg order tools turn these judgments into executable trades. Users enter due to market conditions, and continue using the platform for rebalancing, hedging, and relative value trading.

The third circle is caught by market-making and professional funds. Orders with different purposes and directions enter the same market, improving inventory turnover; market makers connect the index, individual stocks, and external markets to manage remaining risks. Initiating budgets prioritizes continuous quoting and executable depth, evaluating effectiveness based on the actual spreads and price impacts borne by users. Simply rewarding cumulative trading volume can easily lead to just repeated turnover.

The key to the flywheel is that after liquidity improves, funds that were previously unable to participate due to high execution costs can also enter.

A broader trading population brings orders, better buy-sell matching and risk management improve absorption capacity, and reduced price impacts encourage larger portfolios and more strategies to participate. New demand increases the value of continuous quoting, giving professional funds reasons to continue investing. Each circle reduces the participation cost for the next batch of users, allowing the index to grow from a market entry point into a repeatedly traded target.

5. Building Your Own Moat

This changes the relationship between Perp DEX and large exchanges. When large exchanges list constituent stocks, individual stock trading will face dilution; however, the additional available depth from external sources also provides hedging channels for funds trading around the index. The protocol can keep product and customer demands on the index side, allowing professional funds to manage part of the risk in external markets.

Therefore, the product strategy should not stop at "being the first to list a stock that a large exchange does not have." The further goal is to allow the single-stock liquidity provided by large exchanges to be utilized by its own index. The protocol does not need to compete directly with large exchanges on every market; it needs to organize a portfolio exposure worth using, allowing external depth to serve as support for completing this transaction.

Portfolio/index products also shift competition from fees, depth, and brand to the product itself. Different choices of constituents, weights, durations, and adjustment methods lead to different exposures for users. Traders begin to compare which product aligns better with their judgments, rather than just where the same contract is cheaper to trade. Copying is not an option. For the protocol, this is an opportunity to secure product selection rights.

Readers may realize that the index product at this point is no longer a simple "standard product." While the publicly disclosed index rules can be replicated, the market relationships and rebalancing strategies formed through continuous use require time to accumulate. Researchers cite it, traders build strategies around it, market makers become familiar with its orders, and external applications integrate it into their pages. The protocol's advantages gradually lie in these relationships, rather than just a standard constituent list.

This is more worthy of investment than continuously increasing individual stock trading pairs. An index that is continuously cited, traded, and integrated can become the product center of the protocol. Research unfolds around it, the individual stock market connects to it, and external depth is used to manage its risks. Each additional useful connection adds a layer of utility to the original product.

The breakthrough direction for Perp DEX and small exchanges is to transform small-cap stocks from a group of illiquid, undiscovered diamonds into a market that can express industry views, manage portfolio risks, and maintain relative liquidity while connecting to external liquidity. Individual stocks bring opportunities in, while the index expands the ways these opportunities can be utilized. It allows users to trade in the same place without having to believe in the same company.

A protocol can retain funds long-term by meeting users' repeated needs. The perpetual index for small-cap stocks is worth pursuing precisely because it expands this need from the popularity of a single stock to the continuous trading of an entire industry.

Large exchanges can continue to compete for the hottest individual stocks. What Perp DEX should strive for is to become the market that users think of first when trading the entire industry.

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