So, the writer of this article failed to give any proof other than citing the case of one specific stock (American Airlines). Even then, it failed to give any useful comparison (sure, the stock gained 11% in 4 days, but how did the rest of the market do?)
It would take a bit of effort to grab the data for all stocks entering the S&P for the last (say) 5 years, and then compare how these stocks did between the announcement and the joining of the index, but this data is vital to making the case that there is some market inefficiency here. Since the author doesn't bother to do this work, how can they justify their conclusions?
They can't even manage to get the 'easy route' right (letting someone else do the work). They cite 'one estimate' of a $4.3 billion cost but don't bother to tell use who made that estimate, giving the readers no chance to check its validity.
Lazy, lazy journalism IMO. At least quote your source, Bloomberg!
The source for the $4.3B is given later in the article:
"Over a course of a year, front-running -- of stocks going into and coming out of indexes -- costs investors in S&P 500 tracker funds at least 0.2 percentage points, according to research published last year by Winton Capital Management Ltd., a quantitative hedge fund that analyzed data from 1990 to 2011. That’s equal to $4.3 billion in lost income in 2014."
Thanks for linking that. What surprises me is that in their simulation which they base the results on - the early 10 years are way different than the later 10 years. The early years show fairly steady growth (although most of it is concentrated in the middle), and the later years (except for one outlier) are really flat.
This suggests to me that while it was a practical strategy, it isn't so much anymore. With index funds smearing their buys over long enough periods the effect shouldn't even be noticeable.
It would take a bit of effort to grab the data for all stocks entering the S&P for the last (say) 5 years, and then compare how these stocks did between the announcement and the joining of the index, but this data is vital to making the case that there is some market inefficiency here. Since the author doesn't bother to do this work, how can they justify their conclusions?
They can't even manage to get the 'easy route' right (letting someone else do the work). They cite 'one estimate' of a $4.3 billion cost but don't bother to tell use who made that estimate, giving the readers no chance to check its validity.
Lazy, lazy journalism IMO. At least quote your source, Bloomberg!