They still may choose to split a large trade up over multiple days. As an example, the implementation of changes to the S&P500 index will be announced 3 or 4 days before the index is published post-change to give funds enough time to implement the changes. If they all could just execute their entire trades in one go at the next closing auction, the index change could go into effect at the next day's close. They also want to avoid the impact of participants trying to front run the changes.I’m not sure. That would be an issue if they trade during the day, but as I understand it all participants in the closing auction get the same execution.
I think an index fund manager still would need a trading desk to perform good executions given the magnitude of the trades.
But with a large volume of transactions on the same few stocks by multiple large S&P500 funds, there may not be enough market participants on the other side of the trades to get a good trade price in a single closing auction.
It would be interesting to hear how this is manifesting today, but I'm skeptical that large index funds now can be managed without a trading desk. Index funds are generating a larger fraction of trades today compared to say 20 years ago, not fewer, so their trades would seem to be more likely impact the price on themselves today, not less likely.
I would assume that the phenomenon of the closing auction has led to changes in trading strategies.
For index mutual funds, using the closing auction brings the fund NAV when internal trades are done closer to the NAV at close that is used to settle fund investor exchanges in or out. That also will help to reduce tracking error, particularly when the largest stocks are traded by the fund.
Statistics: Posted by Northern Flicker — Mon Oct 21, 2024 1:13 am
