Predatory Trading Around Russell Reconstitution

Zhan M. Onayev, Volodymyr M. Zdorovtsov
2008 Social Science Research Network  
Using eight years of recent reconstitution history, we study the behavior of Russell 3000 additions and deletions on the day when the benchmark composition and weights are determined. We document evidence of strategic predatory trading, whereby closing prices of some securities on this day appear to be manipulated with the objective of influencing the resulting membership weight in the index. Specifically, we find that for the securities most likely to be targets of such trading (additions that
more » ... ing (additions that are closer to the bottom of the newly formed Russell 3000 list and thus more likely to have been pushed into the index), the last day of May contributes a disproportionate share of the monthly return and the last minutes of the trading session contribute disproportionately to the return of this day. Smaller additions also show a greater commonality in their intraday returns on the event day. Perhaps most importantly, we show that smaller additions experience considerably higher event-day order flow imbalances and particularly so towards the end of the trading session. Lastly, we show that these securities do not experience an immediate post-event reversal, as is expected given the liquidity pressure and as is observed for the control group.
doi:10.2139/ssrn.1101341 fatcat:owvawtfddfgsppc7y4fjwwbici