27 June 2017

By Mike Coffey



Like a Hulk Hogan leg drop, the Russell index rebalancing hit the markets last Friday, June 23, creating one of the most active trading days of the year. In fact, a week or month’s worth of a company’s volume can trade in five minutes, providing institutional opportunity for funds that have been waiting on the sidelines, but unwilling to execute a large order. A big index liquidity event like the Russell rebalance provides institutional investors an opportunity to take a large position in a stock with minimal price impact.

Here’s what we saw happen last week.


The Good: New additions to the Russell 1000 and 2000.

Congratulations! If you have been added to the Russell 1000 or 2000 indexes, you are now one of the largest U.S. based companies by market cap. Major index managers like BlackRock, Vanguard, Northern Trust and State Street Global are now forced to buy shares. This will decrease the amount of float of your stock that will trade and likely bring in additional daily volume tied to these index accounts.

You can see from the examples below (FMAO-USA and LIVN-USA) the big spike in volume as index accounts competed for shares into the close, pushing shares higher at the bell.
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The bad: Moving from the Russell 1000 to the Russell 2000

Over the last 12 months, your company has fallen out of the largest 1,000 U.S. based market cap category. And while in theory this seems like a bad thing, in reality there is a lot more institutional money following the Russell 2000, and as a result, stocks that fall in this category would see net buying from the index accounts last Friday.

As you’ll see below: Quality Care Properties and Inovalon Holdings were both projected to move from the Russell 1000 down to the Russell 2000. Both stocks saw big volume spikes into the close and nice price appreciation as the size of the Russell 2000 buy orders trumped the sales from the Russell 1000. In this case the bad wasn’t really that bad after all. 


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Moving from the Russell 2000 to the Russell 1000

You are now one of the largest 1,000 U.S. based companies ranked by market cap. You moved from a big fish in a big pond to being a little fish in a much smaller pond. This move will likely lead to net index selling.

Bright Horizons Family Solutions and Hudson Pacific Properties were both projected to move up into the Russell 1000 Index. As a result, index accounts were net sellers, providing downward pressure into Friday’s close.


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The Ugly: Removal from the Russell

If your shares have fallen below the Russell 3000 market cap threshold or Russell no longer deems you a U.S. based company, index accounts had to sell your shares on the day of the rebalance. This creates downward pressure on your stock as market makers and trading desks are forced to absorb the supply (if no institutional buyer surfaces).

We saw plenty of these scenarios play out in real time last week. We saw projections that both Bio-Path Holdings and Erin Energy were to be removed from the Russell 3000. Both stocks sold off sharply of the day as index accounts were forced to liquidate positions on the close.





Mike Coffey is head of Business Development, Intelligence at Q4 and has over 20 years experience in the capital markets. Mike is a regular contributor to Q4 blog.


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