FTSE Rebalancing

The FTSE Russell, a subsidiary of the London Stock Exchange group that prepares various financial benchmarks, and whose HQ you see pictured, has just rebalanced its family of US stock indexes.

Why does this matter? Well, it matters a great deal to the world of passive asset managers -- pension funds, college endowment funds, and so forth -- because they typically have a strategy and at other times have a specific statutory or regulatory mandate, to follow specified indexes. So if FTSE (pronounced "footsie,") rebalances its indexes, then many of those managers will do likewise with their portfolios, and a lot of assets are going to be bought and sold accordingly.

It matters also to the world of active asset managers because they sometimes see opportunities in arbitraging that situati on for money. Suppose FTSE decides stock ABC is no longer going to be in its index. This requires Big Uni Endowment to drop ABC and buy its substitute. THAT means that presumably the price of ABC will fall in the broad marketplace and the price of the substitute will rise.

This is a classic opportunity for shady touts in real or alleged inside tips. ("Psst, I happen to have the name of the FTSE substitute for ABC. I can tell you, but ya gotsa gimme some Benjamins for it.") If you now the names before Mr Market does, you can of course get ahead of the price moves that he will be driving.

More than that, though, it is an opportunity for the all-stars of high-frequency trading to do their stuff. Even if everybody knows the names at the same time, there presumably will be some who will be able to execute on this situation more quickly than others, getting ahead of the move and getting some profit.

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