| NEW YORK, June 18
NEW YORK, June 18 Investors accustomed to late
market volatility at the end of the quarter should expect an
extra jolt on June 28, when billions of dollars in stock trades
will be executed in less than two seconds.
That is the day Russell Investments sets the final update
for the annual reconstitution of its indexes after the close of
trading. This rebalancing creates a surge of liquidity as
investors readjust portfolios and try to take advantage of
dislocations in stock prices.
"If you are looking to significantly alter your basket or
portfolio, or liquidate or try to buy on the dip... this is a
good place to go to do that because there is going to be more
volume in the last few minutes of trading on the day of the
Russell then there might be over the course of a whole day on
another day," said Gordon Charlop, managing director at
Rosenblatt Securities in New York
This year's changes do not contain an addition as dramatic
as the inclusion of Berkshire Hathaway was,
but there are a number of other, smaller alterations.
According to Nasdaq, approximately 687.9 million shares
representing $9.5 billion in value were traded in the closing
1.15 seconds across the nearly 2,200 Nasdaq-listed stocks in
2012. Credit Suisse estimates $42 billion in gross trading
across the Russell 1000 and Russell 2000 indexes
Because of the massive trade the reconstitution generates,
Russell announces changes in its methodology for inclusion in
the indexes months in advance, as well as a staggered release of
new additions and deletions. The first of those changes was
released on Friday.
"To the extent we know the actual trading activity can occur
in a fairly short period of time, that is why we try to give as
much information evenly to the marketplace within a specified
time frame," said Rolf Agather, managing director of research
and innovation at Russell Investments in Seattle, Washington.
Both the Nasdaq and New York Stock Exchange, a unit
of NYSE Euronext, have contingency plans in place in
case of unusual market conditions resulting from the rebalance.
They include a possible system interruption, which could force
exchanges to re-route trades to backup systems.
Data used by Russell to determine eligible securities,
including market capitalization, is based on the last trading
day in May. A preliminary list of additions and deletions was
released on June 14, and updated lists will follow on June 21
and 28 to allow investors to try and predict the final changes.
In past years, changes in Russell's methodology resulted in
Berkshire Hathaway Inc. and Tyco International
Ltd being eligible for inclusion. According to the
preliminary list of additions, Tyco is being removed from the
Russell 3000 index, because it is now based in
Switzerland, not the United States.
Notable preliminary additions to the Russell 3000 include
Burger King Worldwide Inc., Zale Corp. and
Pacific Sunwear. Preliminary deletions include Dolan
Co. and Discovery Laboratories Inc.
This year, the methodology changes are considered relatively
minor. That leads many analysts to believe the reconstitution
may result in roughly the same amount in gross trading -- in the
$40 billion range -- as in 2012.
"It's not uncommon for Russell to change some of its rules
from year to year, and that usually in turn trickles down to
certain stocks leaving or entering the index, which causes a
little more turnover than usual - but we don't have that this
year," said Stephen Casciano, a strategist on Credit Suisse's
Trading Strategy team in New York.
One potential hiccup for investors is that Russell adjusted
the date for the final rebalance to the last day of the quarter,
preventing fund managers who engage in "window dressing," the
practice of selling underperforming stocks and buying
outperformers, to enhance the appearance of their portfolios.
Russell normally holds the final rebalance a week before the
last day of the quarter. But it was forced to bump it back a
week due to the quarterly settlement and expiration of four
different types of equity futures and options contracts on June
21 - known as "quadruple witching" - which can create
Even though the rebalance is expected to be more subdued
than in years past, investors tend to be on guard, given the
sheer volume at the end of the session.
"If you wanted to be the contrarian you would say, 'Wow,
there is not a lot of interest,' or maybe you would see some
volatility because not too many people are paying attention to
this," said Steve Desanctis, small-cap strategist at Bank of
America Merrill Lynch in New York.
"If you keep saying 'it's not a big deal,' then it's not a
big deal - until it's a big deal."