Predatory Trading Around Russell Reconstitution
26 Pages Posted: 22 Aug 2017
Date Written: July 2017
Using fourteen years of history, the authors study the behavior of Russell 3000 constituents on the last business day of May when benchmark composition is determined for the ensuing annual reconstitution. The paper presents evidence consistent with predatory trading, whereby closing prices of some securities appear to be manipulated with the objective of influencing their index membership status. Specifically, the securities which are most likely to have been targets of such trading (additions closer to the bottom of the newly formed Russell 3000 list and thus more likely to have been pushed into the index) exhibit higher event-day returns, a greater commonality in those returns, and higher order flow imbalances. As expected, these effects become amplified towards the end of the trading session.
Keywords: Predatory Trading, Price Manipulation, Index Reconstitution, Order Flow
JEL Classification: G11, G12, G14, G23
Suggested Citation: Suggested Citation