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
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.
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.
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.
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.
If the stock was added to the index at a normal period then all the shares would be available.
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?
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.
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?
So yeah, they don't really need to stick to 100% of the presented issue.
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.
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.
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.)
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.
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.
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.
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.)
There's more than $1T tracking Nasdaq 100, so that's an ignorant statement.
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.
SpaceX/Nasdaq want to distort the rules to make more money off the backs of those passive investors.
I imagine, though I don't know, that the requirement to use the index name and contents also dictates allocation.
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.
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?
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?
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.
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.
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
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...
SpaceX wants to instantly jump near the top of the pie - capturing tons of the money in index funds for itself, and also therefore taking it away from other companies stocks.
SpaceX (and others like OpenAI, Anthropic)'s private market cap valuation is so high that if they IPO they would instantly jump to the top of the entire stock market. This has never really happened before. By the rules, funds would have to suddenly start buying a huge weight of SpaceX stock - and sell NVDA/AAPL/GOOGL/everything else - to achieve the new balance.
Normally there are rules on how fast a new company can get included in the index. You usually have to be on the market for some time, demonstrate consistently high valuation, etc etc. SpaceX wants to skirt this and jump straight onto the index (near the top).
Further, the rules also usually weight you according to how much of your stock is actually on the market. If you only sell 5% of your company, you only get weighted at 5% of your market cap. SpaceX wants a bonus multiplier so even though they'll only make 5% of their stock available for sale, they want to be weighted in the index as if it was say 15% available. Aka over-bought / boosted price.
This creates both mechanical forced buying and artificially constrained supply. Likely sending the price to the moon, not based on fundamentals but based on gaming the index rules.
Then, once insider lock-up periods are over in a few months, SpaceX can choose to release even more shares - say jumping the available shares from 5% to 100% - which will unleash their full market cap (now even further inflated) and thus capturing even more of the money in index funds.
Index funds being 'passive' guarantees there will be buyers for SpaceX employees and executives to sell their shares to, likely at exorbitantly over-valued prices. At which point they wash their hands of the valuation and your retirement account becomes the new bag holder who has to worry about whether SpaceX is actually worth what you just paid for it.
Just buy everything you can on day1 and go along for the ride?
Longer term, folks should be aware that Wall Street has fully caught on to the normalization of index investing and have been looking at ways to use passive investors as exit liquidity. Private equity and private credit are the two recent high profile examples. There was an executive order recently that directed the federal government to consider allowing these asset classes into 401k's. And these sectors have been increasingly making there way into the public markets in various ways (which is ironic considering the name of the asset class). Same story with crypto.
In the past, most passive index investors worried about fees and portfolio composition and diversity. But moving forward it is probably worth thinking about index governance as well. For example the S&P500 has a one year waiting period before an public company can be considered.
EDIT: to be clear the above are just examples with two funds (QQQ and VT)
It seems kind of likely that SpaceX would make it into most of the major indices on the merits, relatively quickly (the S&P has a 1-year waiting period), just based on its likely size and liquidity.
Pull your money out of the target date funds and into a responsible mix of indexes.
The article shows that at least some ETFs -- NASDAQ index funds -- will now be undermined by this SpaceX scam using those contractual obligations to extract money from ETF investors.
The market usually prepositions a lot of volume pre-add, so much that the add day is usually a non-event. But they usually have a quarter or more to preposition. 15 days is going to cause so much volatility and chaos.
And the funny thing is, the index arb desks can't really opt out of this - you can't arb all names except one in the index.
What a shitshow this would be if the rules pass as presented by Nasdaq.
Also, does Nasdaq think it's worth killing the reputation of their index for the spacex listing? An index is just a list that everyone agrees on following. Losing public trust in this list could mean the end of Nasdaq 100 as a serious contender. There are many alternatives that could easily take its place.
If I had to guess, they are banking on the meme-factor. Tesla is already seriously overvalued IMO b/c it's the first real meme-stock. Now, they are learning lessons from the FTX-invented low-float meme-tokens in crypto and replicate the model in stocks. The story around SpaceX with it's valid successes makes for a very good meme-stock.
So, they hope that people actually want SpaceX exposure no matter what and do not understand how cancerous those low-flow/high-FDIV launches are.
And those desks [should] have quants that are paid a lot of money to figure this out. If they don't, they will get eaten, as they should.
source: Worked on a ETF trade desk.
Vanguard is probably the most principled when it comes to passive index tracking, and they do not have an ETF that tracks the NASDAQ 100 (or any fund that focuses on a single stock exchange for some inexplicable reason).
Yes, you can. Whether or not the index makes sense for whatever one's investing goals may be is irrelevant.
Either way, no, high frequency trading firms are going to beat you to the punch. And shorting elons other company, just because it's over valued by traditional metrics, didn't work out that great for most traders.
Efficient markets hypothesis breaks down with Musk companies.
I get the allure of AI images for blogging, but for Pete's sake review what you're publishing or don't do it.
TIL that foie gras is made out of duck livers as well, not only geese. Not that I'm more likely to eat any now that I know that, but anyway...
> Assume SpaceX IPOs at a $1.75 trillion valuation.
Like Aramco before their IPO with wild post-IPO valuation claims, I am sure that SpaceX will IPO with a market cap far below this estimate.
Also, will the NASDAQ 100 index really fall apart if they make exception for the richest IPO valuation in US history? No. There, I said it out loud. We also survived the Alibaba IPO, and their financial structure is infinitely more shady/unreliable! Ditto for OpenAI and NASDAQ 100, which will follow shortly after.
The "problem" of a single org deciding the composition of stock indices has been argued ad nauseam for the last two decades in financial media. A lot of sweat (and pearl clutching) for little gain/clarity!
1. Garage 2. Buy SpaceX on Day 1.
These index funds are a mechanism for monopolization of 'the market' and it affects real people and it suppresses other markets through the perverse incentive structures it creates.
For example, I launched a crypto project back in 2019 which had its own decentralized exchange but ran into all sorts of hurdles with US regulations and also, the leaders of the community I was involved in were actively suppressing and slandering my project and propping up their biggest competitor's tech instead! All under the nose of regulators who approved all of it! I couldn't believe my eyes and neither could the community. But eventually it's like everyone started assuming that corruption and suppression was normal.
It's insane but it's like everyone is working to satisfy the big money and nothing else matters. Truth is suppressed, companies collaborate with their competitors and with regulators to deliver inferior goods and services to people while limiting their opportunities and dialing up surveillance and control.
At this stage, if I ever get the option to vote for a communist government, I would definitely take it.
Unofficially, we already have the worst form of communism now except the proceeds of the loot are distributed unequally and with a massive constant psyop running to convince people that what they get or don't get is a result of their own actions.
At least if we make communism official, we can shut down that psyop, acknowledge that the system is a controlled monopoly money machine and essentially just handing out money selectively and that the current criteria are arbitrary.
Once people accept the reality that the system has become an automated machine (since at least a decade) and that entrepreneurship and leadership has become redundant, then we can start thinking about fair distribution of the resources which the machine produces. The self-made people are not self-made, they are system-selected. Homeless people are not all lazy or incompetent; they are system-unselected. They didn't become homeless because they were crazy; they became crazy because they were made homeless. They became crazy trying to make sense of what happened to them. They couldn't figure it out because many if them did nothing wrong. They just got caught in a mental loop trying to fix stuff that they couldn't fix because it wasn't in their control. Their fate was always in the hands of the system.
I think the worst part is that some people who were given favorable treatment by the machine actually do believe that they earned their place. They don't know what it feels like to have all the algorithms suppressing their work and opportunities. They think their privileged treatment by algorithms is normal and same as everyone else.
I think Ray Dalio is right that we are near the end of a kind of super cycle with multiple cycles converging towards some kind of major collapse.
We will have to reorganize a lot of things. I hope technology will provide us the support we need to rebuild without the capitalist incentive structure.
The index will have cheaper options contracts than SpaceX while disproportionately subject to the same volatility
That’s the biggest and most egalitarian wealth creation engine in history, aside from some government moves this administration with the currency and commodities
This is only controversial because
A) you’re too married to indexing and told too many people to do it
B) you consider indexing to be sacrosanct for some reason, and consider inclusion to be a reward when it means nothing. this is a symptom of prosperity preaching