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Veserv
super256
This is wrong in multiple ways.
First: 5x5 is 25, not 20. So it's 25% rather than 20%
Second: they only have to buy the 25% of the listed shares.
To take your 1 Trillion example: if SpaceX has a total market cap of 1T, but only 500b get listed on NASDAQ, and the free float is 5%, the index will weigh SpaceX at 25% of the listed shares, which means it will be weighted at 500 * 0.25 = 125b.
And also note that index ETFs have tracking errors all the time (that's why arbitrage traders still have business!), and the ETFs themselves could also track the performance of SpaceX via derivatives instead of buying the stock. And I think, there are many investors of SpaceX who would like to sell some shares. Fund managers won't have an issue finding their phone numbers.
Veserv
It is amazing that you can complain about a simplified example and then both misunderstand it and get literally every single one of your "corrections" wrong.
1. As I made abundantly clear, 20% is the passive ownership of the index. It has no relation to the index weighting which you are mentioning.
2. They have to buy 20% of the weighted value. The actual weight is 5x the float. I chose to use a weight of 100% instead of a multiple of the float as a simplification since any weighting greater than the float could result in a squeeze given a large enough passive/obligated ownership pool. However, since I was expecting this sort of "correction", I chose 20% passive ownership of the index (i.e. 1/5) so that they would have to buy 20% of the 25% which is 5%, the same amount as the 5% float. This would result in the passive investors having to purchase all of publicly traded stock which is the divide by zero point that spikes the stock. So, even if your correction was not wrong, I also already countered it.
3. Tracking errors are distinct from intentionally not tracking the index you are contractually obligated to match. You are insinuating that the target of these financial manipulations will defend their clients by ignoring their legal obligations and blaming it on "tracking error". While that is possible, I see no reason to assume that will be the case upfront or to do anything other than apply blame to the entity attempting to financially manipulate retirement accounts into lining their own pockets.
4. Yes, there are other insiders with shares. I used a simplified example where there is a single insider, the founder, to highlight the power that the insiders have over the pricing in such a squeeze. However, you also got this wrong because insiders usually have lockup periods after the IPO that are longer than the 15-days expected for index inclusion. As such, the fund managers would not be able to purchase any shares other than the public shares until after the first rebalance.
rokobobo
I don’t think Nasdaq is free float based.
Also, I would be a lot more pessimistic of the index tracking fund managers’ ability or willingness to find extra shares: their goal is to match the index, not beat it. If the index includes the new firm at a blown-up price because everyone sent their buy orders at the same closing auction, then all the index-tracking funds still track their underlying index. They do not care that after that closing auction, the price of the new firm—and likely the index itself—is going to drop.
super256
>I don’t think Nasdaq is free float based.
I recommend the NDX proposal from February which the whole discussion is based upon:
"To balance index integrity and investability, Nasdaq proposes a new approach for including and weighting low-float securities (those below 20% free float). Each low-float security’s weight will be adjusted to five times its free float percentage, capped at 100%. Securities with more than 20% free float will continue to be weighted at full, eligible listed market capitalization, while those below 20% free float will be weighted proportionally to preserve investability."
The document includes a scenario with the rules applied to SpaceX. "Company C" in the table is SpaceX (with some estimated numbers).
https://indexes.nasdaqomx.com/docs/NDX_Consultation-February...
throwaway2037
> also note that index ETFs have tracking errors all the time (that's why arbitrage traders still have business!)
super256
I didn't mention retail traders anywhere. With arbitrage traders I mean those companies who do hft all the time and are directly connected to exchanges. They still do business.
bryanlarsen
Yes, when SpaceX gets added to the index, it's going to skyrocket for just that reason. The other reason why SpaceX stock is going to skyrocket is because of the "infinite potential". After all, Elon is going to be God-Emperor of Mars, and how much is a piece of that worth?
The OP knows this and wants a window to profit from this squeeze. For the general public index owners, the sooner it's added to the index the better, minimizing the time that traders can front run this squeeze ahead of them.
Perhaps better it's not added to the indices at all, but as long as it's inevitable, the sooner the better.
wredcoll
Being added to the index is literally the only thing causing "the squeeze" according to this description though so how does that benefit either the author or the index holder?
If the stock was added to the index at a normal period then all the shares would be available.
bryanlarsen
The author wants to buy ahead of the indexes and benefit from the squeeze; he wants the normal rules of waiting a year before SpaceX is eligible to join the indexes to apply.
throwaway2037
How will a colony on Mars be profitable?
fragmede
How many Earth dollars would you pay to go live on Mars?
cyanydeez
Come on man, either we ship the unmentionables, or the billionaires get to live with their robot love slaves.
Obviously, you don't have enough imagination to keep Musk's ego based cost-proposition elvated.
infinitewars
SpaceX has always been a about convincing private industry to fund the militarization of space.
See https://en.wikipedia.org/wiki/Golden_Dome_(missile_defense_s...
Mars is a thin cover story to get the engineers to feed the War machine. "National security" / nuclear threat is a great excuse to get politicians to sell out the country.
How about we focus on global security?
bryanlarsen
I thought it was obvious that "God Emporeror of Mars" was a satirical answer. There are a whole bunch of new markets that cheap access to space open up. Like Bezos' dream of in-space manufacturing. Or Musk's dream of data centres in space. Or power gen in space. Or the "cis-lunar economy". Or space tourism. Or He3 on the moon. People will buy SpaceX stock for the potential, even if that potential is pretty much worthless and the chance of SpaceX capturing the gains rather than some other company is fairly low.
"National Security" is just one more in a big list.
vasco
> To get the remaining 15%, which they are contractually obligated to acquire, they must purchase from the founder. As they are in violation of their contract if they fail to acquire the remaining 15%, the founder now has complete control to dictate any price they want.
This is not correct and I'm surprised this comment is upvoted to the top. The float is the float, nobody goes to buy shares that aren't available in the float.
KellyCriterion
Thanks ++1
twothreeone
> To get the remaining 15%, which they are contractually obligated to acquire, they must purchase from the founder. As they are in violation of their contract if they fail to acquire the remaining 15%, the founder now has complete control to dictate any price they want.
I can't imagine "any price they want" is quite right here. At the very least, shouldn't we expect underwriters and other stakeholders (in this case Nasdaq, Inc.) to negotiate option-contracts as part of the IPO deal to cover their future obligations?
Yes, it might be a "worse" deal than those initial 5% - though we don't even know that - but then institutional investors time horizons are typically much longer than 6 months. Unless you think SpaceX goes straight down to 0, it seems like a risky but calculated, long-term investment.
I agree they could be more transparent about it, but maybe they will send out a notice in the prospectus update?
riffraff
Index funds have a variety of ways to replicate the index beyond physical replication, including options, buying "similar things", sampling etc..
So yeah, they don't really need to stick to 100% of the presented issue.
Galanwe
Index funds and ETFs also have strict replication rules limiting the amount of non-physical replication in their legally binding prospectus...
The more physical a tracker is, the lower the tracking error, but also the more fees you have to pay. "Good" ETFs/IFs are often 98% physical. This makes for higher fees, but more safety for subscribers in case of large swings.
So it's not like they are _free_ to replicate however they see fit, the replication mechanism is part of the product.
throwaway2037
Such a bold claim. Since we are talking about stock indices here... Can you provide a well known (liquid) non-leveraged example that does not directly trade the underlying stocks? It would probably make the create/redeem process more complex for market makers.
fweimer
But the real scenario is going to be different in two ways: Market capitalization of the new company will only be a small fraction of the index total, even after it's been inflated as indicated. And not all investors in companies on the index are index funds, which brings down the number shares needed to align a fund.
Maybe they propose the rule change because it adjusts for some other problematic effect of the existing index rules? The discontinuity might seem acceptable because it is unlikely to be reached according to their simulations.
gruez
>That is the scheme described: how to short squeeze retirement funds who do not even have shorts for fun and profit.
How many retirement funds use the nadasq 100 as the benchmark? The only thing that's really objectionable is the 5x multiplier, and so far as I can tell that's confined to the nasdaq 100 index. If the funds use a sane index without such shenanigans, it won't be affected nearly as much, and the whole debate just turns into the perennial question on whether [company] is overvalued and whether passive investors are being taken for a ride.
nighthawk454
Most indexes will be affected. Two of the most common indices - the S&P500 and DJIA - are cross-exchange and include Nasdaq stocks. The biggest market cap companies on the market (MAG7) are all on the Nasdaq exchange and comprise about 35% of the S&P.
edoceo
Is this grey cause it's wrong? They are all on Nasdaq; and also around 35% of S&P. What am I missing? Is it that the "Most indexes" part is wrong (cause there are more than a few thousand ETF)?
dh2022
Actually these two indices will not be affected k as the article explains
michtzik
Who is contractually obligated to buy?
igor47
I have an index fund for NASDAQ with my broker. When I bought into the fund, the broker promised me that with my money, they will buy shares in companies traded on that exchange according to the specific formula that SpaceX is manipulating here. My broker is obligated to buy. They could open a new fund that has a contact like "we'll keep doing what we had been doing except for the whole SpaceX thing" but they would need my permission to move the money. And I'm only in this fund because it was recommended by my 401k provider -- I don't know anything about any of this. That's the messed up thing here -- the people being screwed are not sophisticated investors, it's nurses and school teachers who hope to retire.
CGMthrowaway
Yeah basically this. These shenanigans water down the value of QQQ. The bottom line is if you don't like QQQ, then dont buy it. Buy the stocks separately or a different index. But for people who don't pay attention, or for people whose 401k's limit their investment options, it is difficult / impossible to avoid the shenanigans
gpderetta
If the rules used to compute the index change (as opposed to the index composition of course), are index funds obliged to follow them no matter what? I assume this is very fund dependent, but would be interesting to know what most guarantee.
chii
and that's why sector specific indexes are not "good" - only broad market (heck, even global) indexes are worth passive investing for.
A nasdaq index is no different from any other thematic index (like an oil index, or a robotics index). Thematic indexes tend to fail the investor in the long term for capturing beta. But because of lack of knowledge of the _actual_ academic research by retail investors, a lot of clever marketeers sell the idea of a thematic index as tho it is similar to a broad market index ("safety" and diversification).
Caveat emptor.
jayd16
Some funds promise to track the Nasdaq. I guess the idea is they can't sorta track it and they can't artificially track it through some financial proxy. They have to own real shares?
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corford
Nice explainer here: https://substack.com/@georgenoble/note/c-226667679?r=3il429
kmeisthax
Any Canadians in the room should remember this as the exact mechanism by which Nortel Networks became astronomically huge. Any time Nortel got more valuable, index funds tracking the Toronto Stock Exchange (TSE) loaded up on Nortel, amplifying the price increase. This gave the company massive amounts of capital to buy other companies with, which generated more headlines, which brought in more investor capital, which brought more index funds in. In fact, at one point Nortel was so valuable it made the TSE too homogenous to legally index, at least until Nortel lobbied Canada to change the rules regarding diversified index funds.
If you aren't Canadian (like me) you can watch this Bobbybroccoli video that explains it very well: https://www.youtube.com/watch?v=I6xwMIUPHss
Spoiler alert for the Bobbybroccoli video, but it turns out this trick doesn't work forever. And when Nortel inevitably crashed it left a good chunk of Canadians as bagholders. And looking at the stock market over the past few years, where basically all the the growth is seven companies, I'm starting to wonder if we're finally seeing America's answer to the Nortel fiasco.
(No, Lucent doesn't count, even though they're literally America's counterpart to Nortel. The key factor that made Nortel a problem was the lack of diversity in the Canadian market. Lucent crashed and burned in a field of hundreds of growing big-cap stocks, Nortel was an extremely big fish in a tiny pond.)
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markisus
I’m trying to understand the mechanics here. I get that SpaceX and Nasdaq are in cahoots to get SpaceX bundled with a bunch of other stocks (and that bundle is called QQQ?)
But why must retail investors hold this bundle? If I’m holding now, I can sell it and buy a different bundle right? And if I’m not holding it now, I can just continue not to buy it after SpaceX gets included.
nighthawk454
There's trillions of dollars sitting in indexes that are quite literally 'passively' invested. Virtually everything holds this bundle in one way or another. Passive indexing has both outperformed and overtaken active investing - leading a lot of money into VOO/VTI/QQQ/etc that track the S&P500 or some other index ("the market"). For retirement funds like 401ks, retail contributes money every paycheck that gets routed into these indexes. There may not even be much of a choice - your 'plan' may only let you pick some kind of "Target Date Fund" and then the institution picks what it goes into, usually indexes.
If you fully actively managed your own money and picked mostly individual stocks (not broad indexes) then yeah you could change your allocations. But there's a lot of money already in.
markisus
QQQ is problematic because it’s influenced by strange back room dealings with Space X, if the article is to be believed.
VTI is different. It literally tracks all public stocks, weighted by market cap so no such manipulation is possible.
If a bunch of people will be forced to buy Space X (QQQ holders), active investors will short the stock in anticipation of market correction and money will flow from those who were forced to buy. I’m sure there are other ways to take advantage of a forced buyer situation.
Total market will be unaffected, assuming efficient market hypothesis / no arbitrage.
nighthawk454
QQQ is not in isolation. It’s just a bundle of stocks. Rebalancing that will affect the prices of its constituent stocks, which include some of the highest market cap stocks. Those same stocks are also in many of those other popular market-cap weighted indexes (VTI, VOO, SPY, etc). Price action originating from Nasdaq 100 rebalancing would affect everywhere else those stocks are held. Which is a lot of places.
Except those other indexes won’t have SpaceX. Suggesting any index price moves would be … asymmetric at best.
Now it’s being reported that they’re angling to get SpaceX in the S&P 500 index as well [1]. Maybe if all the indexes get it then it balances out everywhere, who knows. This whole event would be in beyond unprecedented territory.
[1] https://finance.yahoo.com/news/p-weighs-rule-changes-speed-1...
bagacrap
Bingo. No sane investor holds QQQ because there is no academic theory behind why it should exist. Why is a stock better if it's listed on NASDAQ instead of NYSE? Can any investor answer this question? Doubt it. If you are into factor investing and you like large cap growth, you buy something like VUG. Most people should just stick with SP500 or total market.
However, QQQ had a really good last 15 years and lots of investors hold it because they are chasing returns and because the marketing worked. (The managers of QQQ are legally obligated to spend X% of the fees collected on advertising the ETF, ha ha ha.)
maest
> No sane investor holds QQQ
There's more than $1T tracking Nasdaq 100, so that's an ignorant statement.
throwaway2037
Yeah, I had a milk-up-the-nose moment when I read that Brandolini's Law atomic bomb. I swear when anything finance appears as a topic on HN, the amount of bullshit/misinformation far exceeds the good stuff.
blitzar
> Why is a stock better if it's listed on NASDAQ instead of NYSE?
The NASDAQ is a stock exchange based in the United States. It’s made up of around 3,500 companies, with a heavy weighting towards companies in the information technology sector.
> If you are into factor investing and you like large cap growth
If you are into factor investing and like large cap tech, you buy something like QQQ.
> No sane investor holds QQQ
The insane can take comfort in their 20% CAGR for the last 10 years on a massive large cap tech expansion.
iSnow
Yes, you can sell and buy a different index. However, those who buy ETFs want broad market exposure without picking stocks (or ETFs). Also selling and re-buying means you have to pay taxes now - depending on jurisdiction, that is way worse than holding till you are retired and then selling.
SpaceX/Nasdaq want to distort the rules to make more money off the backs of those passive investors.
markisus
If you sell and then rebuy isn’t that considered a wash trade and therefore exempt from taxes?
MPSimmons
If you are a financial brokerage and you want to offer the S&P 100 or the NASDAQ 100, you can't just do that. You have to license that - https://www.spglobal.com/spdji/en/custom-indices/solutions/
I imagine, though I don't know, that the requirement to use the index name and contents also dictates allocation.
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kleene_op
Does this only affect money invested after June 15th, or does this also devalues money invested before this date? If you don't invest anymore money in the index during the interim rebalancing period refered to by the author, then one should be alright. Right? It's really expensive to get all your marbles out, I'd rather not do it if I don't have to.
bagacrap
Right, you are trapped if you are holding QQQ in a taxable account and have substantial gains, so you should do nothing with the shares you already have. But no, ceasing to invest in it will not save you. The rebalancing discussed in the article happens internally with you already invested dollars.
But do take this moment to realize QQQ never made sense to invest in, and put your future dollars somewhere else. There are plenty of funds that overweight large cap tech but track an index that doesn't care which exchange the stock is listed on.
konaraddi
QQQ rebalances on a schedule. Existing holders are affected because the fund’s underlying composition will change.
stanislavb
This. If you are invested in a Nasdaq index (e.g. QQQ), it will have to sell some of the tail and buy the necessary weighted percentage of Snake Oil. Apart from you buying snake oil, you will realise some extra capital gains/loses due to the rebalancing.
sethops1
And to be clear it's not just QQQ; countless retirement target date funds have a Nasdaq component. That's the real target of this grift, your retirement fund.
mcs5280
It's a small club and you ain't in it
debbiedowner
Tsla is 1.4T market cap, so it's almost like *ELON-stock is going to double in 1 day. It will go from 4% to 8% of qqq in 1 day.
It'll happen a week or a month after IPO date though? It took fb/meta 1 year and then it entered as 1% qqq. TSLA entered 3 years after IPO so probably a small percentage.
Tsla is 2% vti (2T AUM). QQQ is 400B AUM. So add those two and you get $56B of purchasing. This seems like the amount they want to raise via IPO in total in the news, so the banks who do the IPO can sell it all guaranteed.
But people will want to buy it before it gets into the passive funds... So... Post inclusion market cap will be higher than we expect?
IAmGraydon
Silicon Valley is mostly made up of schemes designed to defraud investors disguised as the hottest new tech startups. Elon recognized this sometime around 2020 (likely starting with his foray into the world of the crypto pump/dump) and decided to skip the formalities and go straight to the fraud, no apologies. That's been his business model ever since. His companies are just a vehicle for this now.
femto
Why can't an index fund compute and track their own objective index, thus ignoring any distortion introduced by the Nasdaq?
aloha2436
They don't target something else because they wouldn't be an index fund, that's just a passive fund with their own published strategy. Those exist but aren't as popular, the appeal of index funds is that you're just getting "the market" and "the market" is measured by the index. Public indexes are supposed to be lower-cost and less manipulable, but that was before they got large enough to "wag the dog," which is the ultimate point of the article.
tverbeure
Because when I buy QQQ expect it to track the Nasdaq-100, not something else.
bagacrap
Vast majority of index funds do not track NASDAQ 100.
wredcoll
This is the detail I'd really like to know more about
bagacrap
The top 3 most popular index fund ETFs track S&P500, which doesn't really pull this kind of shenanigan. Only QQQ tracks the NASDAQ 100 and it's in 5th place by assets under management.
You should probably read a book about index investing if you are going to invest.
runako
This is not a prediction.
SpaceX is looking at an IPO in the range of $1.75T on revenues of ~$16B. That's ~100x revenue (let's ignore the net for the moment).
How have recent IPOs done when they went out in the neighborhood of 100x revenue?
danieltanfh95
Really the same mechanics with crypto
xrd
I came here to say this, too. I remember hearing "500M market cap!" and then realizing that was because one person created a new token with 1M coins, bought one themselves for $500, and then started screaming "$500M market cap!" Technically it is true, but it really takes the "greater fool" theory to new heights.
siavosh
Anyone know if vanguards VTI is immune from such practices?
cholmon
VTI just tracks the CRSP US total stock index, see https://investor.vanguard.com/investment-products/etfs/profi...
The CRSP index itself adds new companies within 5 days of their IPO, see https://www.crsp.org/what-owning-the-market-really-means/
> The CRSP US Total Market Index, by contrast, adds all IPOs ranging from mega caps to small caps—accounting for 98% of the market—within the first five trading days of the stock’s listing.
So it sounds like SpaceX will show up in VTI sooner than in the Nasdaq100, even with their new "fast entry" rule.
gruez
The actual scheme described in the OP requires the multiplier to work, though. Otherwise it's just like any other company that's tightly held, in which case only the free float counts and the scheme unravels.
stockresearcher
Yes. As long as the free float is at least 10%, it will get the fast track into VTI. According to their methodology guide, they use free float for weights and total shares for ranking. So this IPO would be a mega cap with a tiny weight. Totally the opposite of what a manipulator would want!
https://www.crsp.org/wp-content/uploads/guides/CRSP_Market_I...
I know that a lot of Vanguard funds track CRSP indexes. Right about now is when I wish they had and ETF that tracks this one:
https://www.crsp.org/indexes/crsp-us-total-market-ex-mega-ca...
BoggleOhYeah
[dead]
bagacrap
vti is free float adjusted, so not as susceptible. But:
Elon will naturally do everything in his power to pump his stock, as every CEO does, and VTI buys shares in proportion to how successful that is. That is the nature of passive, market cap weighted investing.
If you want to underweight Elon's companies, or, generally, weight companies based on something besides market cap, you have to get into active or factor investing.
It mostly doesn't matter though, because if and when one stock drops, those investible dollars will likely flow into another stock, so VTI doesn't really care.
names_are_hard
When a stock drops in value, the dollars don't flow anywhere, they just disappear. Think about this: For every buyer ("putting money in a stock") there is a seller ("taking money out of a stock') at exactly the same price. So dollars aren't "in" a stock at all - the shares exist and are said to have some dollar value based on the recent trading price or open orders in the market. When the price drops, it's because the collective consensus on how much those shares are worth changed, and the dollars assumed to have exist prior are just gone.
tartoran
Obligatory video from Patrick Boyle
https://www.youtube.com/watch?v=8rS3fTbC7TE
Edit: someone posted it on HN, there's already a thread for it : https://news.ycombinator.com/item?id=47388640
alecco
I don't see him even bothering to link to the original research (AFAIK Reuters and expanded by this thread's substack post who links to Reuters). His video description is all about self-promotion. And from the bits I've seen he posts it like he made the finding. That's not neighborly.
I mean, it seems he is a decent content producer and presenter, but if we incentivize ripping off original research things will go bad.
https://www.reuters.com/business/finance/elon-musks-spacex-w...
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To explain the mechanism simply.
Suppose you had a index of 100 companys each with a market cap of 1 G$ for a total of 100 G$. You have passive investors owning 20 G$ of that index, amounting to 20% of the total, 20% of each company, and 200 M$ per company.
You then rotate out a company for a new one also worth 1 G$. The index is still 100 G$, but to match the index you are contractually required to sell your 20% ownership of the old company and are contractually required to buy 20% ownership of the new company.
However, the newly added company only released 5% of its shares to the public and the founder kept hold of the remaining 95%. Those fund managers are contractually obligated to buy 20% of the newly added company, but only 5% is available. Like a short squeeze, where the squeezer buys and holds supply so there are not enough purchasable shares to cover the shorts (obligated ownership), this is a financial divide by zero.
To get the remaining 15%, which they are contractually obligated to acquire, they must purchase from the founder. As they are in violation of their contract if they fail to acquire the remaining 15%, the founder now has complete control to dictate any price they want.
That is the scheme described: how to short squeeze retirement funds who do not even have shorts for fun and profit.
Note that this is a minor variation on my post on the same underlying topic here: https://news.ycombinator.com/item?id=47392325