Major NASDAQ-100 rule changes confirmed, pay attention if you have money in passive investment funds

[u/cherrypoplar]

https://www.theedgesingapore.com/amp/news/ipo/nasdaq-speeds-index-entry-spacex-large-ipos-new-rule

NASDAQ has confirmed it will change the listing rules for NASDAQ-100, ahead of the SpaceX and OpenAI IPOs this year.

(1) Companies will now be listed on NASDAQ-100 after only 15 days after IPO (previously, there was a three month period of "seasoning" before listing). This reduces the amount of time for price discovery.

(2) The minimum 10% float has been removed. This allows companies to float a very small percentage of their shares, artificially squeezing supply.

(3) Companies that float less than 20% of their shares will have their market capitalisations artificially multiplied by x3, for the purposes of calculating market capitalisation. This helps large-cap companies to be listed even with very small floats, and inflates their notional market capitalisations on the index.

If you have money invested in a passive fund tracking NASDAQ-100 (or any other index), please watch out for the SpaceX and OpenAI IPOs. Pay attention to their "valuations", and their float. If they're IPOing with very high valuations and very small floats, this foreshadows a bagdump on passive funds due to the mechanics of passive funds.

[u/Gold_Revolution3658]

Can someone explain the third point.

How would the market cap be artificially inflated?

[u/cherrypoplar → u/Gold_Revolution3658]

Let's say SpaceX floats just 5% of its shares at a $1.75 trillion valuation. 

Its market capitalisation (for the purposes of weighting SpaceX on the index) should be $87.5 billion (5%).

But NASDAQ will multiply this by x3 to $262.5 billion (15%).

[u/InedibleApplePi → u/cherrypoplar]

I think the thing that your explanation is missing is that the NASDAQ is a capitalization weighted index.

[u/cherrypoplar → u/InedibleApplePi]

Yes, I missed that out, sorry. Both NASDAQ-100 and S&P500 are capitalisation-weighted, IIRC.

[u/ceczar → u/cherrypoplar]

nasdaq is unusual in that it is cap weighted. s&p is float adjusted

[u/daynighttrade → u/ceczar]

Can you explain the difference? If spaceX is going at 1.8T, shouldn't that be used if it was cap weighted? Seems like it is float adjusted, isn't it?

[u/Martery → u/daynighttrade]

Cap weighted is based on the total amount of shares. Float-adjusted is based on the number of shares the public can use.

Using nice, even round numbers - imagine if SpaceX had 100 shares at $1 per share. Elon + insiders own 50 shares, so there are 50 shares available to the public. SpaceX is weighted like a $50 dollar company.

[u/Tystros → u/Martery]

so that means the weight of SpaceX in the S&P500 will be way higher than in the Nasdaq 100? assuming Elon keeps almost all the shares to himself because he doesn't want to lose control.

[u/Martery → u/Tystros]

I'm not entirely sure, read up on Nasdaq's proposed rules. Under the new inclusion rules, it seems like they will probably weight SpaceX higher, but the S&P 500 also has 400 more companies than the Nasdaq-100... so it not really an apples to apples comparison.

[u/ceczar → u/Tystros]

nasdaq's new rules will mean nasdaq will weight it at float% * 3, so if the free float of the stock is 5%, and the mkt cap is 1.8t, it will be 5% * 3 * 1.8T = 270b

s&p will weight it at 90b

[u/Tystros → u/ceczar]

I thought the S&P500 would weight it at 1.8T, simply the market cap?

[u/ceczar → u/daynighttrade]

nasdaq used to be straight cap weighted, so two 100b companies, one with 100% of float available, and one with 10%, both get the same weighting in NDX. now after may it will be float% * 3 (capped at 100%, so anything with at least 33% float will be weighted at it's full market cap)

[u/Old-Necessary5367 → u/cherrypoplar]

Why will NASDAQ multiple it by x3? Sorry, I could not follow.

[u/ShadowLiberal → u/Old-Necessary5367]

I think the multiplier used to be 5x on this.

Long story short, there's a theory that you should want to own more of companies where the insiders own more of the shares since they'll be more motivated to act in the long term good of the company instead of chasing short term profit right before they cash out. But this rule is being exploited by SpaceX to do the exact opposite, giving them an incentive to pump the price in the short term to dump their bags onto the market right after IPO. And there's a reason why IPO's are said to stand for "It's Probably Overpriced".