Russell Index to Rebalance on Close Tomorrow, June 22

If you trade the RUT Index or RUT options (or IWM), you should be aware of the annual Russell Rebalancing on the close of trading tomorrow. 

The Russell 2000 (RUT) is a subset of the Russell 3000 (a subset of Russell Global). While the RUT makes up 2/3 of the Russell 3000, the market cap of the 2000 is only ~ 10% to 12% of the 3000. Tomorrow, Friday, the Russell 2000 will rebalance (add and delete stocks) to arrive at the components in the Russell 2000 for next year. This had been done quarterly but is now done annually. Estimates vary, but as many as 160 to 190 stocks may be added to the RUT. Some stocks being added could be coming down from the Russell 3000 or could be stocks not currently on either list being added. Some being deleted may be moving up to the 3000 or dropping below the required threshold.

Last year on the annual rebalancing, over 750 million shares traded, worth in excess of $10.6 billion. This all took place in less than 2 seconds! 

What does this mean to you as an investor? That depends! Some investors believe that a stock being added to an index like this will benefit – higher visibility, funds looking to mimic the 2000 will have to be buyers of those shares, etc. Stocks being deleted could fall in value as funds wouldn’t need to own those shares. Some investors have tried to identify which stocks will be affected, and may have initiated stock or options positions accordingly. Either way, a good number of stocks will see volume spikes on the close tomorrow, and some of those could see options implied volatilities spike or collapse.

The NASDAQ Stock Market recently issued NASDAQ Equity Trader Alert #2012-25 which, in relevant part, indicates that on Friday, June 22, 2012, Russell Investment Group will use the NASDAQ Closing Cross for the annual Russell Reconstitution and includes a list of potential contingency scenarios in order to prepare the industry for unusual market conditions. 

The CBOE has received inquiries from market participants about our contingency plans for options trading on CBOE and stock trading on CBSX should any of the contingency scenarios identified by NASDAQ occur. Please refer to CBOE Regulatory Circular RG12-078 issued today June 21st, regarding the Russell Reconstitution tomorrow, Friday, June 22, 2012.

Good luck trading!

Marty Kearney