NEW YORK, June 26 (Reuters) - Investors can expect a surge in volume at the close of trading on Friday, when Russell Investments announces the annual rebalance of its series of indexes that will affect more than $5 trillion in assets.
The reconstitution requires asset managers to adjust their portfolios to align with indexes such as the small-cap Russell 2000 and the Russell 3000, which represents most of the largest publicly traded U.S. companies.
Credit Suisse anticipates about $42 billion will trade on Friday as a result of the reconstitution, which will make it one of the biggest trading days of the year in terms of dollar volume.
About $5.2 trillion in assets are benchmarked to the popular Russell indexes.
According to Nasdaq, trades in 696.5 million shares representing $14.1 billion across 2,271 Nasdaq-listed stocks were executed in 1.7 seconds during its closing cross in 2013.
Russell takes steps during the course of the year to minimize price dislocations from such a huge trading event. The indexer does a preliminary ranking of companies from largest to smallest market capitalizations at the end of May. Finally, preliminary additions and deletions are listed roughly two weeks before the final announcement.
“Better that we make it transparent if there is opportunity for one person to game another,” said Rolf Agather, managing director of global index research and innovation at Russell Investments in Seattle.
Stock exchanges are also preparing for the size of the trade, should any technical difficulties arise. Major U.S. exchanges will hold a conference call beginning at 3 p.m. (1900 GMT) to help monitor for outages or unusual market conditions.
Just ahead of the rebalancing of the Russell Indexes, the London Stock Exchange said on Thursday that it was buying the index company for $2.7 billion from Northwestern Mutual. The purchase will put the LSE in third place in the growing exchange-traded fund market, ranking behind S&P Dow Jones and MSCI.
Some of the notable changes so far this year include the removal of Delphi Automotive and Liberty Global because they no longer meet Russell’s “domicile” requirement for the United States and have been assigned to other countries. Tyco International, which was removed in 2013 after being assigned to Switzerland, is being re-added.
Going forward, Russell may have more determinations to make, as a result of a flurry of “tax inversion” deals that have taken place, in which companies such as Walgreen Co have the potential to relocate outside the United States to qualify for a lower tax rate. If the majority of a company’s revenue comes from the United States, it may be classified there even if it is headquartered elsewhere.
“Russell recognizes what they call ‘domiciles of convenience,'” said Chad Dale, director of index research at ITG in New York.
“There are always cases where something fits right in a gray area between things, so there are always judgment calls at play.” (Reporting by Chuck Mikolajczak; Editing by Jan Paschal)