Nasdaq's Shame

> To get the remaining 15%, which they are contractually obligated to acquire, they must purchase from the founder. As they are in violation of their contract if they fail to acquire the remaining 15%, the founder now has complete control to dictate any price they want.

I can't imagine "any price they want" is quite right here. At the very least, shouldn't we expect underwriters and other stakeholders (in this case Nasdaq, Inc.) to negotiate option-contracts as part of the IPO deal to cover their future obligations?

Yes, it might be a "worse" deal than those initial 5% - though we don't even know that - but then institutional investors time horizons are typically much longer than 6 months. Unless you think SpaceX goes straight down to 0, it seems like a risky but calculated, long-term investment.

I agree they could be more transparent about it, but maybe they will send out a notice in the prospectus update?

>That is the scheme described: how to short squeeze retirement funds who do not even have shorts for fun and profit.

How many retirement funds use the nadasq 100 as the benchmark? The only thing that's really objectionable is the 5x multiplier, and so far as I can tell that's confined to the nasdaq 100 index. If the funds use a sane index without such shenanigans, it won't be affected nearly as much, and the whole debate just turns into the perennial question on whether [company] is overvalued and whether passive investors are being taken for a ride.

Yes, when SpaceX gets added to the index, it's going to skyrocket for just that reason. The other reason why SpaceX stock is going to skyrocket is because of the "infinite potential". After all, Elon is going to be God-Emperor of Mars, and how much is a piece of that worth?

The OP knows this and wants a window to profit from this squeeze. For the general public index owners, the sooner it's added to the index the better, minimizing the time that traders can front run this squeeze ahead of them.

Perhaps better it's not added to the indices at all, but as long as it's inevitable, the sooner the better.

Who is contractually obligated to buy?

Bingo. No sane investor holds QQQ because there is no academic theory behind why it should exist. Why is a stock better if it's listed on NASDAQ instead of NYSE? Can any investor answer this question? Doubt it. If you are into factor investing and you like large cap growth, you buy something like VUG. Most people should just stick with SP500 or total market.

However, QQQ had a really good last 15 years and lots of investors hold it because they are chasing returns and because the marketing worked. (The managers of QQQ are legally obligated to spend X% of the fees collected on advertising the ETF, ha ha ha.)

There's trillions of dollars sitting in indexes that are quite literally 'passively' invested. Virtually everything holds this bundle in one way or another. Passive indexing has both outperformed and overtaken active investing - leading a lot of money into VOO/VTI/QQQ/etc that track the S&P500 or some other index ("the market"). For retirement funds like 401ks, retail contributes money every paycheck that gets routed into these indexes. There may not even be much of a choice - your 'plan' may only let you pick some kind of "Target Date Fund" and then the institution picks what it goes into, usually indexes.

If you fully actively managed your own money and picked mostly individual stocks (not broad indexes) then yeah you could change your allocations. But there's a lot of money already in.

If you are a financial brokerage and you want to offer the S&P 100 or the NASDAQ 100, you can't just do that. You have to license that - https://www.spglobal.com/spdji/en/custom-indices/solutions/

I imagine, though I don't know, that the requirement to use the index name and contents also dictates allocation.

https://en.wikipedia.org/wiki/Index_fund

Right, you are trapped if you are holding QQQ in a taxable account and have substantial gains, so you should do nothing with the shares you already have. But no, ceasing to invest in it will not save you. The rebalancing discussed in the article happens internally with you already invested dollars.

But do take this moment to realize QQQ never made sense to invest in, and put your future dollars somewhere else. There are plenty of funds that overweight large cap tech but track an index that doesn't care which exchange the stock is listed on.

QQQ rebalances on a schedule. Existing holders are affected because the fund’s underlying composition will change.

They don't target something else because they wouldn't be an index fund, that's just a passive fund with their own published strategy. Those exist but aren't as popular, the appeal of index funds is that you're just getting "the market" and "the market" is measured by the index. Public indexes are supposed to be lower-cost and less manipulable, but that was before they got large enough to "wag the dog," which is the ultimate point of the article.

Because when I buy QQQ expect it to track the Nasdaq-100, not something else.

Vast majority of index funds do not track NASDAQ 100.

VTI just tracks the CRSP US total stock index, see https://investor.vanguard.com/investment-products/etfs/profi...

The CRSP index itself adds new companies within 5 days of their IPO, see https://www.crsp.org/what-owning-the-market-really-means/

> The CRSP US Total Market Index, by contrast, adds all IPOs ranging from mega caps to small caps—accounting for 98% of the market—within the first five trading days of the stock’s listing.

So it sounds like SpaceX will show up in VTI sooner than in the Nasdaq100, even with their new "fast entry" rule.

vti is free float adjusted, so not as susceptible. But:

Elon will naturally do everything in his power to pump his stock, as every CEO does, and VTI buys shares in proportion to how successful that is. That is the nature of passive, market cap weighted investing.

If you want to underweight Elon's companies, or, generally, weight companies based on something besides market cap, you have to get into active or factor investing.

It mostly doesn't matter though, because if and when one stock drops, those investible dollars will likely flow into another stock, so VTI doesn't really care.

I came here to say this, too. I remember hearing "500M market cap!" and then realizing that was because one person created a new token with 1M coins, bought one themselves for $500, and then started screaming "$500M market cap!" Technically it is true, but it really takes the "greater fool" theory to new heights.

Tesla has been this for a long time since the price fundamentally does not reflect the quality or future of the company, yet the road is littered with dead Tesla bears.

Efficient markets hypothesis breaks down with Musk companies.

What, QQQ or SpaceX?

Either way, no, high frequency trading firms are going to beat you to the punch. And shorting elons other company, just because it's over valued by traditional metrics, didn't work out that great for most traders.

To be fair, QQQ is not really an index fund. Unless you think that I can make up whatever arbitrary list of stocks I feel like, and call it an index, and create an ETF that tracks it, and still call that an index fund.

Vanguard is probably the most principled when it comes to passive index tracking, and they do not have an ETF that tracks the NASDAQ 100 (or any fund that focuses on a single stock exchange for some inexplicable reason).

Index funds divvy up money into stocks, in this case weighted by market cap. More market cap = bigger slice of the pie.

SpaceX wants to instantly jump near the top of the pie - capturing tons of the money in index funds for itself, and also therefore taking it away from other companies stocks.

SpaceX (and others like OpenAI, Anthropic)'s private market cap valuation is so high that if they IPO they would instantly jump to the top of the entire stock market. This has never really happened before. By the rules, funds would have to suddenly start buying a huge weight of SpaceX stock - and sell NVDA/AAPL/GOOGL/everything else - to achieve the new balance.

Normally there are rules on how fast a new company can get included in the index. You usually have to be on the market for some time, demonstrate consistently high valuation, etc etc. SpaceX wants to skirt this and jump straight onto the index (near the top).

Further, the rules also usually weight you according to how much of your stock is actually on the market. If you only sell 5% of your company, you only get weighted at 5% of your market cap. SpaceX wants a bonus multiplier so even though they'll only make 5% of their stock available for sale, they want to be weighted in the index as if it was say 15% available. Aka over-bought / boosted price.

This creates both mechanical forced buying and artificially constrained supply. Likely sending the price to the moon, not based on fundamentals but based on gaming the index rules.

Then, once insider lock-up periods are over in a few months, SpaceX can choose to release even more shares - say jumping the available shares from 5% to 100% - which will unleash their full market cap (now even further inflated) and thus capturing even more of the money in index funds.

Index funds being 'passive' guarantees there will be buyers for SpaceX employees and executives to sell their shares to, likely at exorbitantly over-valued prices. At which point they wash their hands of the valuation and your retirement account becomes the new bag holder who has to worry about whether SpaceX is actually worth what you just paid for it.

If you are an index investor, it is probably not worth your time and energy to make any drastic changes because of this particular incident. Space X will comprise a small percentage of the indexes in question, and any impact on your portfolio will likely be imperceptible. And if your holdings are in a taxable account, the tax hit from selling are probably not worth it.

Longer term, folks should be aware that Wall Street has fully caught on to the normalization of index investing and have been looking at ways to use passive investors as exit liquidity. Private equity and private credit are the two recent high profile examples. There was an executive order recently that directed the federal government to consider allowing these asset classes into 401k's. And these sectors have been increasingly making there way into the public markets in various ways (which is ironic considering the name of the asset class). Same story with crypto.

In the past, most passive index investors worried about fees and portfolio composition and diversity. But moving forward it is probably worth thinking about index governance as well. For example the S&P500 has a one year waiting period before an public company can be considered.

My understanding: It depends on what index the fund is tracking. QQQ tracks the Nasdaq-100 so QQQ is vulnerable. VT tracks the FTSE Global All Cap Index so VT is not directly affected by Nasdaq’s choices but is still exposed to some extent because spacex is likely going to be in the aforementioned FTSE index, Nasdaq’s actions impact spacex’s market cap, and thus Nasdaq’s actions impact spacex’s position in the aforementioned FTSE index which in turn affects VT’s composition (to a smaller extent than QQQ’s).

EDIT: to be clear the above are just examples with two funds (QQQ and VT)

The claim is that Nasdaq is going to artificially admit SpaceX to the Nasdaq-100, an index they control, in order to win their business away from NYSE. If the index you invest in is derived from the Nasdaq-100, that's problematic.

It seems kind of likely that SpaceX would make it into most of the major indices on the merits, relatively quickly (the S&P has a 1-year waiting period), just based on its likely size and liquidity.

Yeah the ETFs have sold off their trust quite a bit in the past year. No longer can anyone with skin in the game trust the stewardship of the fiduciaries. They are simply showing that they are bad at what they do and people should not entrust their future to them.

Pull your money out of the target date funds and into a responsible mix of indexes.

Good question. I don't know, but I'll point out that different indexes have different rules, so someone would need to check if a change to the rules for Nasdaq indexes affects the others you mention. (Perhaps they follow what Nasdaq does somehow?)

You are fine because you don't hold QQQ.

I learned: sell all my Nasdaq etfs prior to June.

Garage -> Gavage?

[dead]

this account is obviously an LLM...

Simple solution is to not invest in funds that track NASDAQ indices.

There are plenty of other funds out there that track other indices from other providers.