Stock tokens give exposure to an equity through a token that trades continuously. The appeal is obvious to anyone who has watched news break on a Saturday. The structure underneath is worth understanding before treating the price as a price.
Two clocks, one asset
The equity trades on an exchange with an open and a close. The token trades always. So for most hours of most weeks, the token has a live price and the thing it references does not.
During those hours the token is not tracking the equity, because there is no equity price to track. It is expressing what its participants think the equity will open at — which is a forecast, priced by whoever happens to be trading, in whatever depth happens to exist.
Readers of this Journal have met this shape already. It is the same problem as an ETF options book against a coin options book: two instruments over one asset running on different clocks, and a gap at the open that is a catch-up rather than a signal.
Why the gap is not free money
The obvious trade is to arbitrage a divergence between token and equity. The reason it is harder than it looks is that the arbitrage requires being able to transact both legs, and for most of the window when the divergence exists, one leg is closed.
So the divergence is not necessarily mispricing. Part of it is the genuine cost and risk of carrying a position across a closed market, which is a real cost that somebody has to be paid to bear. A weekend gap on a stock token is doing a job, not making an error.
The liquidity question underneath
Whatever the token’s reference asset does, the token itself lives in a pool, and everything in this series applies to it unchanged. Its depth is not its volume, its exit costs what the curve says it costs, and its depth can be arriving or leaving regardless of how the underlying company is doing.
That last point is the one most likely to catch an equities trader. You can be completely right about the company, and about the equity, and still exit badly — because the risk you took was in the pool, not in the stock. There is no gamma to read on these, no dealer forced to hedge them; the structure to read is liquidity, exactly as in on-chain liquidity versus an order book.