The Inside Scoop

January 01, 2004

This marks the inaugural Inside Scoop column: where ET meets fourth-period trigonometry. The Scoop (that's what we'd like to be known as forthwith a la Mickey D's for McDonald's) will provide an up-close look at the macro trends and strategic focus of the index industry, and the individuals behind it who are pulling the gears and spinning the wheels. We will take an entertaining look at these characters and serve up the inside scoop on the latest products and developments that are being forged by the index providers, exchanges and product managers leading us to the indexing promised land.


There is a lot going on in the world of indexing lately. A potentially enormous shift is happening in the index industry, and the S&P/Citigroup deal is the latest shot across the bow. So many shots, so many bows … it's getting hard to keep track.

A lot of screaming and yelling. That's what was coming out of Solomon Smith Barney two years ago. The insider debate over free-float methodology grew to a (nearly) public roar. Most large institutional investors do not take kindly to roaring, however, and what should have been righteousness played more as desperation. Ironically, of course, Solomon was absolutely right, and all the major index providers -save one, their new owner, S&P have since switched to free-float methodology.

Where are they now? Tom Nadbielny and Ian Toner led the charge on adoption of free-float methodology. Acerbic yes (and with more than a few, ahem, tense relationships in the industry), but whip smart, they are no longer working at Citigroup. Tom Nadbielny is heading up a company called Pension Benchmark Corporation that develops indexes and provides custom portfolio analysis. We have not been able to track down Ian. Anyone?

Back to S&P and free float. Standard & Poor's is now talking about free-floating the S&P 500. Coincidentally, they came out with a paper on possible free float just before the deal for S&P to purchase Solomon Smith Barney/Citigroup indexes closed … the endless two-year deal. A certain wellplaced Editorial Board member at a very large index vendor that consists of two proper names and a conjunction told me that the timing on the free float and deal announcement did concern S&P, but they went ahead with it anyway.

So big and strong, S&P makes an obvious target. I saw it happen twice recently at the Art of Indexing conference in September:

1) SEC Chief Economist Larry Harris directly and publicly confronted David Blitzer with an idea he's apparently been discussing with him-fruitlessly-for months. Harris wants the S&P 500 to stagger the capitalization movement for its index changes over a one-week time period. Standard & Poor's says it's unclear what if any change such a system would have on moderating index effect, though the potential increase in direct transaction costs would be one sure thing. We're taking no position on the proposal, but do think it is interesting, and think even more interesting was the public spilling of the SEC pressure on S&P

2) On free float, Burton Malkiel publicly threw down the gauntlet for S&P to make the switch at a luncheon at that same conference.

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