Hi all,I am just wondering what type of manipulation could potentially happen on the day that an index rebalances?The few scenarios I can think of are :1. Knowing that clients are ready to "sell at the close", dealers' prop desk deliberately sell large amount towards market close in order to take up the shares later again from the client at the depressed share price.2. Knowing that clients are ready to "buy at the close", dealers' prop desk deliberately buy large amount towards market close in order to dispose of the shares later again to the client at the elevated share price.(correct me if I am wrong)Anything you guys can think of ?Thank you!

Yes, dealers might be front-running the clients who need to rebalance. However, what about the other people who will be front-running the front-runners?

i thought this trade went out of fashion about 10 years ago when long only managers realsied that they were been mugged at every rebalancing and started doing their switches way before. In fact, I think the stocks that were coming out quite often outperformed the stocks going in during the rebalancing period.I wouldn't want to build a whole trading strategy around this.

I agree, doing this is a bit silly and I think people, by and large, have realized it...However, as last Friday showed, when consensus positions are very large and concentrated, you can really predict what the buggers are gonna do.

QuoteOriginally posted by: daveangeli thought this trade went out of fashion about 10 years ago when long only managers realsied that they were been mugged at every rebalancing and started doing their switches way before. In fact, I think the stocks that were coming out quite often outperformed the stocks going in during the rebalancing period.I wouldn't want to build a whole trading strategy around this.Quite true, one can confidently predict what stocks will be dropped and the likely candidates to replace them in every index rebalancing point, by following the criteria and rules of the index management firm. On the other hand, index trackers have the objective to track the index with the minimum (adverse) tracking error and cost. They are not obliged to hold every index constituent neither to have 100% of AUM invested exlusively in the index.