Just to explain the volume for anyone that doesn't know what...

Just to explain the volume for anyone that doesn't know what goes on.

When a stock is included into the 200, or 100 or 10 etc, a number of things occur. If you look at stocks that have been included, you will notice a major spike one day before inclusion occurs. This occurs only on one day and it's all over as fast as it started.

So why the volume?

No it is not institutions buying the stock because they now all of a sudden like it, or because they have to for weighting purposes.

When a stock is included or upgraded, Market makers (mostly institutions) create a multitude of new options and warrants, this occurs over time. Many of you would have heard of terms such as naked or covered. The majority of the new instruments will be required to be covered, for example say if Macquarie write one option, they must own one share to 'cover' that option. Often the case is that Macquarie already own a share to cover, however it will need to be transferred to the appropriate arm. So the bulk of the volume you see isn't actually buying and selling, it's just shuffling from one to the other to make everything comply, which is why price generally doesn't move.

That's the bulk of the volume accounted for, the second part is to do with weighting, There are many funds out there that are limited to constituents of a particular index, however that does not mean they have to own everything within that Index. There are however a much smaller number of funds that do run a methodology of weighting directly against an index, which means they will own all stocks within the Index, the largest Market cap will be their heaviest position and the smallest cap will be their lightest position. What shifts inbetween are the percentages calculated by their own risk models.

So these funds will also contribute to volume, but again, it is generally just a shuffle from one account to the other. Under most other circumstances a volume spike like that is a sign to stand up and pay attention to, however with regards to rebalance volume spikes, they are just something to ignore.