This is well known known effect. S&P rebalances it index through out the year and there are always people trying to predict adds and drops and make some money.
The real diseconomy happens in the Russel indexes. They are rebalanced annually with the methodology for adds/drops announced ahead of time. Various funds that are pegged to Russel are forced to rebalance at this time buying and selling huge baskets in one day. To avoid large stock market movements and capitalize on them traders try to predict the changes to the index and prebuy the rebalance trade. Their actions through the market leading up to the rebalance and agreements to sell the rebalance trade to the Russel pegged funds reduce price swings on the day of the rebalance.
Trading desks that engage in the Russel trade spend the entire year preparing for it, modeling the methodology, acquiring clients for the rebalance trade, and prebuying the trade. Their profit comes from the difference between the closing price (mostly governed by Russel adds/drops) on the day of the trade and the price that they prebought at. Essentially their ability to accurately predict the rebalance add/drops and acquire clients to sell the rebalance trade to. There are desks that make $10s of millions this way on that day. There may be desks that make $100 of millions this way.
PS. I may not have stated it clearly, but funds that are pegged to Russel indexes make agreements with external traders to handle their rebalance trade for them at a fixed bps to the closing price. Traders are able to make money on this because they can take on risk and prebuy the trade; something that the Russel indexed funds can not do.
The real diseconomy happens in the Russel indexes. They are rebalanced annually with the methodology for adds/drops announced ahead of time. Various funds that are pegged to Russel are forced to rebalance at this time buying and selling huge baskets in one day. To avoid large stock market movements and capitalize on them traders try to predict the changes to the index and prebuy the rebalance trade. Their actions through the market leading up to the rebalance and agreements to sell the rebalance trade to the Russel pegged funds reduce price swings on the day of the rebalance.
Trading desks that engage in the Russel trade spend the entire year preparing for it, modeling the methodology, acquiring clients for the rebalance trade, and prebuying the trade. Their profit comes from the difference between the closing price (mostly governed by Russel adds/drops) on the day of the trade and the price that they prebought at. Essentially their ability to accurately predict the rebalance add/drops and acquire clients to sell the rebalance trade to. There are desks that make $10s of millions this way on that day. There may be desks that make $100 of millions this way.
PS. I may not have stated it clearly, but funds that are pegged to Russel indexes make agreements with external traders to handle their rebalance trade for them at a fixed bps to the closing price. Traders are able to make money on this because they can take on risk and prebuy the trade; something that the Russel indexed funds can not do.