Re:Why Index Funds Are Like Subprime CDOs
by holdenc on Wednesday September 04, 2019 @08:07PM
(#20882657)
The S&P reconstitutes itself four times a year. But, imagine that your scenario worked anyways -- the investor would have less than $1000 since the S&P index missed the recovery of Acme Inc. But considering the largest constituent of the S&P (MSFT) is only around 4% of the index total weight, the impact of Acme Inc's price decline would not be great.
Re:Why Index Funds Are Like Subprime CDOs
by thoughtstheseus on Wednesday September 04, 2019 @07:59PM
(#20882607)
Index changes don’t happen like that and a drop that large would freeze trading.
Re:Why Index Funds Are Like Subprime CDOs
by badfrog on Wednesday September 04, 2019 @10:27PM
(#20883358)
There is no market rule that prevents a single stock from dropping 99% in a day. LULD only halts trading for a few minutes, then there's an auction that could result in any price.
Re:Why Index Funds Are Like Subprime CDOs
by ckdarby on Wednesday September 04, 2019 @11:14PM
(#20883572)
There is no market rule that requires a single stock from not being halted.
Please show me a one day 99% drop on a stock. Trading would be halted well before that to prevent manipulation or errors.
Re:Why Index Funds Are Like Subprime CDOs
by badfrog on Wednesday September 04, 2019 @11:31PM
(#20883635)
The rules are covered here: https://www.sec.gov/oiea/investor-alerts-bulletins/investor-...
LULD is the one that applies to single stocks. It only results in a five minute halt, as I said.
The market-wide circuit breaker can halt the entire market for a full day, but only in response to a 20% move in S&P500, not a single stock.
Re:Why Index Funds Are Like Subprime CDOs
by saimiam on Wednesday September 04, 2019 @11:35PM
(#20883650)
If it were a straight drop of 99% - say it is trading at $100 at tick_1 and at tick_2, it is trading at $1, trading will be halted at point which happens to be after a 99% drop. In reality, stocks gap downwards in a series of shallow steps which are unlikely to be 99% in one tick.
More info on the 10% trading halt rule: https://www.nasdaqtrader.com/Trader.aspx?id=TradeHalts
Day 1: (before crash) price : 200$ S&P 500 weight : 2%
Day 2 :next day market crashes. Acme is very low volume so price crashes to 1$ .
what happens next ? do all the EFT that follow S&P have to sell all ACME for 1$ because it is not in the S&P 500 anymore.
Day 5 : ACME jump back to 200 $ and is back in the S&P 500.
So my question is what would have happen to a passive investor. if he bought 1000$ worth of ETF right before the crash. Will he still have a 1000$ dollars at the end of it .