Tagged: Russell rebalance

Rustling Data

The Russell Reconstitution is so big everybody talks about it.  And yet it’s not. 

The Nasdaq touted its role facilitating this year’s Russell reset, saying, “A record 2.37 billion shares representing $80,898,531,612 were executed in the Closing Cross in 1.97 seconds across Nasdaq-listed securities.”

Impressive, no question.  That’s a lot of stuff to happen in the equivalent of the proper following distance when driving 65 mph (a rule often ignored, I’ve observed).

I’d also note that the Closing Cross is not the “continuous auction market” required by SEC rules but a real auction where buyers meet sellers. Regulators permit these to open and close markets.

The Nasdaq said, “Russell reconstitution day is one of the year’s most highly anticipated and heaviest trading days in the U.S. equity market, as asset managers seek to reconfigure their portfolios to reflect the composition of Russell’s newly-reconstituted U.S. indexes.”

The press release said it was completed successfully and the newly reconstituted index would take effect “Monday, June 29, 2020.”

Somebody forgot to update the template.

But that’s not the point.  What the Nasdaq said is untrue.  The Russell rebalance June 25, 2021 was not “one of the heaviest trading days in the US equity market.”

It was 159th out of 252 trading days over the trailing year, using the S&P 500 ETF SPY as a proxy (we cross-checked the data with our internal volume averages for composite S&P 500 stocks, and against other major-measure ETF proxies).

SPY traded 58 million shares June 25 this year but has averaged over 72 million shares daily the trailing twelve months.

Whoa.

Right?

This is market structure. If a stock exchange doesn’t know, who are you counting on for facts about the stock market?

CNBC June 29, 2021

I snapped the photo here hurriedly of the conference-room TV at ModernIR yesterday with CNBC’s Sara Eisen and former TD Ameritrade Chair Joe Moglia. But look at what they call in video production the lower third, the caption.

That’s what hedge-fund legend Lee Cooperman said in the preceding segment. “Market Structure is totally broken.”  Eisen and Moglia were talking about it.

When I vice-chaired the NIRI Annual Conference in 2019, I moderated the opening plenary session with Lee Cooperman, Joe Saluzzi, co-author of the book “Broken Markets” (you should read it), and Brett Redfearn, head of the SEC’s division of Trading and Markets (now head of capital markets for Coinbase).

The market may not appear broken to you. But you should know that market-structure events occur about 70 times per year. And the Nasdaq ought to know if the Russell Reconstitution is really a heavy trading day. It’s their business.

Just as it’s your business, investor-relations professionals, to know your market. The equity market.

Just the preceding week, June quad-witching owned the Russell Reconstitution like Mark Cavendish sprinting at the Tour de France.  Worse, actually, though few cycling moments match seeing The Manx Missile win his 31st stage after having left the sport.

It was a beatdown.  SPY volume June 16-18 averaged 97 million shares, 67% higher than the Russell rebalance, peaking the 18th at 119 million shares. 

And June 30, 2020, the final trading day of the second calendar quarter last year, SPY traded more than 113 million shares, nearly twice this year’s Russell volumes June 25.

June 30 is today. 

In fact, the last trading day of each month in the trailing twelve averaged 99 million shares of SPY traded.

What do those dates and June 16-18 have in common?  Derivatives.  Each month, there are six big expirations days: The VIX, morning index options, triple- or quad-witching, new options, the true-up day for banks afterward, and last-day futures.

This final one is the ultimate trading day each month featuring the lapsing of a futures contract used to true up index-tracking. The CBOE created it in 2014 for that purpose. Russell resets may be using it instead.

What’s it say that derivatives expirations are 67% more meaningful to volume than an annual index reconstitution for $10 trillion pegged dollars, or that average daily volume in SPY, the world’s largest exchange-traded derivative – all ETFs are derivatives, substitutes for underlying assets – exceeds volume on a rebalance day?

That your executive teams and boards better know. They deserve to know. If you give them anachronistic data unreflective of facts, it’s no help. Imagine if Lee Cooperman is right, and our profession fails our boards and executive teams.

No practice has a higher duty to understand the equity market than the investor-relations profession.  If you’re not certain, ask us for help. We’ll arm you so you need never worry again about fulfilling it.

Russelling Stocks

We’re back!

At the NIRI Annual Conference last week in Phoenix (where foliage defied fiery environs) we launched an ad campaign for investor-relations professionals that graced the escalator wall into the hall, and the ModernIR booth hummed.

I had the honor of co-vice-chairing, and my market structure panel with hedge-fund legend Lee Cooperman, market commentator Joe Saluzzi, and SEC head of Trading and Markets Brett Redfearn kicked off the conference Monday June 3rd.

Due to an inadvertent clerical error, I was also named a NIRI volunteer of the year (here with NIRI CEO Gary LaBranche and board chair Ron Parham) along with TopBuild’s Tabitha Zane.  And I met NIRI co-founder Dick Morrill who at 97 can still deliver a ringing speech.

Post-conference, Karen and I bolted briefly to our mountain home, Steamboat Springs, where frost dusted the grass twice the last week and Sand Mountain jutted white-capped above a voluptuous carpet of grasses and blooms.

Meanwhile back in the stock market, with trade fears gripping the world – US stocks zoomed at the best rate in 13 months, posting six straight days of gains, a 2019 record, beating even the heady January start.

Against this backdrop loom big index rebalances. The Russell indices have been morphing toward July 1 reconstitution in phases that persist through the next three Fridays. On June 21, S&P quarterly rebalances will join the jammed queue, as will stock and index options and futures expirations June 19-21.

And expiring June 28 when the Russell finalizes are monthly CBOE futures contracts created to help indexers true up benchmark-tracking on the month’s last trading day.

Russell says $9 trillion of assets are pegged to its US equity indexes.  For perspective, the Russell 1000 is 95% of US market cap, the Russell 2000 most of the remaining 5%, as there are only 3,450 public companies.

What’s at stake with rebalances is thus more than pegged assets. It’s all the assets.

Passive assets are now over 50% of managed money, Exchange Traded Funds alone drive more than 50% of volume. The effects of these events are massive not due to susurrations in construction but in the capacity for price-changes to ripple through intertwined asset classes and the entirety of equity capitalization.

It’s like being in Group One on a United Airlines flight.  The fewer the airlines, the bigger the audience, the longer the line.

When the money wanting to queue up beside a benchmark was an eclectic conclave outside Palm Springs, rebalances were no big deal. Now passives are Los Angeles and rebalances are a Friday afternoon rush hour.

Put together the trillions tied to Russell and S&P indexes, the trillions in equity-linked swaps benchmarked to broad measures, the hundreds of trillions tied to expiring currency and interest rate swaps, the ETF market-makers trying to price ETFs and stocks driving $125 billion of daily trading volume, the Active “closet indexers” mimicking models, the Fast Traders with vast machine-computing power trying to game all the spreads. It’s keying the tumblers on the locks to the chains constraining the Kraken.

It’s not a myth. It’s already happening. Stocks imploded when the Communication Services sector was yanked like a rib from the torso of Tech and Consumer Discretionary stocks last September. It happened repeatedly through October, November and December 2018 as sector and market-cap ETFs washed like tides over stocks.

It happened in January, March, May, this year.

And it just happened again. What was it? Strafing waves of short-term passive shifts.

Lead market behavior in June so far? Risk Mgmt – continuous recalibration of derivatives bets.  Followed by Fast Trading – machines changing prices. Followed by Passive Investment (which tied to Risk Mgmt is ETFs, far and away the biggest combined influencer).

All these behaviors are 30%-43% higher than Active Investment as influencers. Defined as percentages of trading volume the past five days, Active is 11.6%, Passive, 26.9%, Fats Trading 41.4%, Risk Mgmt 20.1%.

What’s rustling the thickets of equity volatility, introducing unpredictability into stocks across the board, are vast benchmarked behaviors and their trading remoras.

The longer everyone persists in trying to assign rational motivation to moves, the more dangerous the market becomes. This isn’t complicated: The elephant in the room is the money watching prices – passive, speculative, hedged.  If observers are looking elsewhere, we’ll sooner or later get caught off-guard.

Let’s not.  Instead, be aware. Know the calendar.  Listen for Russelling stocks.