NVX Chart, page-2004

More stocks ensnared

The other aspect of the rise in the number of indices means more stocks are now caught up in rebalance trades. In Australia, volumes in small and micro cap stocks have increased significantly as a result of index rebalances.

For stocks that face deletion or addition from the mega indices the spikes in volumes can be overwhelming. But Rabinowitz says this is no longer a source of great trading profits.

The storm-catchers, he says are being forced to search deeper and wider to identify stocks that will be moved around by large index-related flows. The more obscure and bespoke the index is, the better the chances are that the fast money isn’t already in the trade.

Perhaps the most dramatic recent change in the world of institutional share trading is the rapid rise in Environmental, Social and Governance mandates.

In just one year from June 2020 to June 2021, index provider MSCI says the amount of funds tracking its ESG benchmarks more than doubled to $US580 billion.

It’s now a far more lucrative game to pick ESG winners and losers than it is picking the stocks that will be added or booted out of the index.

Passive activism is the now the biggest game in town, not only for large pension funds, and asset managers but fast money hedge funds.