A Profitable and Legal Way to Game the Stock Market
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A Profitable and Legal Way to Game the Stock Market
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Re: A Profitable and Legal Way to Game the Stock Market
#2Is there a "Index Frontrunning" fund which I can invest in? (The fund would automatically frontrun all index changes, and so keep management fees to a minimum.)
Re: A Profitable and Legal Way to Game the Stock Market
#3I expected to see (1995) tagged to the end of this article.
I personally know 3 people who run their own money ( Having said that, this isn't exactly easy. You need to know
1) if a stock is going into the index
2) when its going into the index
3) how much the index will buy
4) how much the index buy will affect the price of the stock
the first 3 are trivial for some index funds, though most have rules that allow them some leeway here so there aren't always sure things.
The 4th is where you make your money.
And it isn't like there aren't other's doing this, the article makes it seem much easier than it actually is.
If you play the game theory through you'd realize that if you knew the stock is going into the index then you are probably too late to profit from it as someone else will speculate the stock is going to go into the index the week before and already move the stock.
Funds can't really avoid this, and to be honest they don't really care to avoid it. It doesn't affect them at all, they are just supposed to mimic the index. Though you do start to get into a strange feedback loop whereby the index fund that is supposed to track the index starts to dictate how the index moves, we'll call this the "index inception" effect:)
Re: A Profitable and Legal Way to Game the Stock Market
#4I expected to see (1995) tagged to the end of this article. I personally know 3 people who run their own money ( Having said that, this isn't exactly easy. You need to know 1) if a stock is going into the index 2) when its going into the index 3) how much the index will buy 4) how much the index buy will affect the price of the stock the first 3 are trivial for some index funds, though most have rules that allow them…
> I expected to see (1995) tagged to the end of this article.
+1.
The "making hundreds of millions" part made me laugh too. Bet that's news to the index desks.
Re: A Profitable and Legal Way to Game the Stock Market
#5A way to avoid this is to not buy the indexes themselves but deeper capitalization based funds like VTI etc. This is still basically an index fund but since it buys past the "500" it avoids this BS.
Re: A Profitable and Legal Way to Game the Stock Market
#6This is basically the primary trading strategy employed in the The Ugly Americans. The time period covered is mid 1990's
https://en.wikipedia.org/wiki/Ugly_Americans:_The_True_Story...
Re: A Profitable and Legal Way to Game the Stock Market
#7A way to avoid this is to not buy the indexes themselves but deeper capitalization based funds like VTI etc. This is still basically an index fund but since it buys past the "500" it avoids this BS.
Why would you want to avoid it? Either VTI is a better investment (for your profile, of course) than the S&P 500 and such or it isn't; it doesn't really matter if it's because of "index frontrunning" or any other factor.
Re: A Profitable and Legal Way to Game the Stock Market
#8How is this considered unethical? If you know X will buy loads of shares of an equity and you learned that fact legally through (presumably) public channels, are you A) a scoundrel, or B) smart, for buying shares before X buys those shares?
When somebody does something out of the ordinary it's necessarily considered a "game" (read "scam") by the majority establishment.
The reality is that the index is buying the stock because it views it as a good value, meaning that it is currently "under-priced". The index could be then viewed as unethical for "stealing" the shares away from current holders at a lower price than their intrinsic value, unless they were to tell somebody first... like a "frontrunner". In most cases, the largest entity is viewed as corrupt and evil, because it has the means to make the most efficient decisions and capture all the value, but somehow indexes are regarded as altruistic cooperatives.
They're not. S&P is owned by McGraw Hill Financial ($5 billion revenue), CME Group ($3 billion revenue), and News Corp ($33 billion revenue).
Re: A Profitable and Legal Way to Game the Stock Market
#9How is this considered unethical? If you know X will buy loads of shares of an equity and you learned that fact legally through (presumably) public channels, are you A) a scoundrel, or B) smart, for buying shares before X buys those shares? When somebody does something out of the ordinary it's necessarily considered a "game" (read "scam") by the majority establishment. The reality is that the index is buying the stoc…
It's a 1%/99% story. The second paragraph pretty much says so: "hedge funds and Wall Street trading desks are reaping hundreds of millions at the expense of index mutual funds, the investments of choice for a growing number of ordinary Americans."
Wall Street vs The Ordinary American™ makes for popular news stories.
Re: A Profitable and Legal Way to Game the Stock Market
#10How is this considered unethical? If you know X will buy loads of shares of an equity and you learned that fact legally through (presumably) public channels, are you A) a scoundrel, or B) smart, for buying shares before X buys those shares? When somebody does something out of the ordinary it's necessarily considered a "game" (read "scam") by the majority establishment. The reality is that the index is buying the stoc…
It's a 1%/99% story. The second paragraph pretty much says so: "hedge funds and Wall Street trading desks are reaping hundreds of millions at the expense of index mutual funds, the investments of choice for a growing number of ordinary Americans." Wall Street vs The Ordinary American™ makes for popular news stories.
Good point.