While it's technically true that index funds could have started buying TSLA on Wednesday already, they didn't, due to the big risk of "tracking errors".
Index funds is judged by their tracking accuracy & by their management fees.
3/
TSLA enters the S&P 500 out of the blue, at a huge 150 basis points weight worth $80b, 130m shares.
Yesterday index funds were still 150 bps away from their target allocation.
4/
Below is an article listing tracking errors: 5 basis points is the best, tracking error above 15 bps is unusual and this was 10 years ago ...
The 150 bps TSLA weight gradient is a huge tracking dispersion risk.
Technically index funds are allowed to buy after inclusion, but this risks tracking errors: should TSLA rally away from the 12/18 closing price, every 1% rally costs them 1.5 basis points of tracking error.
6/
This means that due to the exceptionally large weight gradient most index funds would prefer to buy 130m TSLA shares at 𝙚𝙭𝙖𝙘𝙩𝙡𝙮 tomorrow's closing price.
7/
If tomorrow's closing cross falls short of 130m shares, then market participants will know that there's a shortfall of shares & indexers want to buy TSLA ASAP, which might bid up the price.
That's a tracking error risk many of them don't want to take, IMO.
8/8
I don't know whether index funds will have 130m shares worth of g̶u̶l̶l̶i̶b̶l̶e̶ willing institutional TSLA shareholders lined up for tomorrow's closing cross - but the closing volume will be an important metric to watch, it will IMO define next week's trading range.
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I.e. only about 69m shares worth of shareholders were willing to sell to index funds in the closing cross, and a large short seller sold them ~40m shares after-hours for $695.
This explains the sharp AH "spikes" to $695 visible in charts that many commented on.
Here's a finer grained view of the market anomaly: lots of huge orders with hundreds of thousands of shares slipping up to 695 & filling there.
I presume these were the indexers buying OTC/dark, while the entity 'painting' the price moved liquidity back to $680 quickly.
🟢 Bullish scenario: if there's a significant index buying shortfall as the numbers below suggest, then a post-inclusion rally might begin on Monday.
🔴 Bearish scenario: if that's wrong then @garyblack00's 10-20% pullback is possible too.
Any short term hedge funds driving a 10-20% correction had:
✅ 47m buy liquidity in AH to sell @ ~$680
✅ 69m liquidity to sell @ $695 on the close
Why didn't they sell? 🤔
3/
There's two main explanations:
✅ either hedge funds are confident about higher TSLA prices next week
✅ or the HF-selloff hypothesis was false to begin with, as explained by former large hedge fund quantitative equities and derivatives trader below.
In reality probably quite a few of the buyers on the close were not passive index funds:
❌ shorts covering or getting covered
❌ active funds that didn't want to stay TSLA-short against their benchmark & wanted to track TSLA at exactly the closing price
❌ options writers
3/
So the 13.6m shortfall of indexing shares is likely substantially higher.
Monday TSLA trading will IMO be determined by market participants thinking these through, and by continued index fund accumulation.
But macro might interfere, and so might market shenanigans. 🤠
At around 3:20, seeing the lack of shares, the big index accumulator started flooding the TSLA market with sell requests, overwhelming demand & triggering stop losses of retail & other investors.
The sell tick below alone was over 400,000 TSLA shares.
I expect next Monday to be crazy: passive index funds only managed to buy ~70m out of the ~130m TSLA shares required, despite paying an all-time-high $695 price for 70m shares (!).
They'll still have to accumulate another 50m shares. (!)
Assuming I understood the market mechanics outlined by @TeslaPodcast in yesterday's video correctly, that almost all index funds would buy on the close, the minimize tracking errors.
BTW., @SEC_Enforcement should urgently look into the shameful market manipulation that occurred shortly before the closing cross: when big market participants pushed the price down below $630, to trigger stops and to use delta hedging to provide them shares...