The historic stock market volume may be this week as Tesla moves into the S&P 500

The addition of Tesla to the S&P 500 at the end of this Friday will be one of the biggest trading days in history, but it is the most recent example of the trend that is taking place: these codes are increasingly influencing what index managers decide inside and out.

“Restructuring has become a major trading event because more investors are tied to the index, so the volume of trade has increased during the restructuring,” market maker Old Mission’s Harry Witten told me.

Wheaton noted that the biggest days of trading are now generally in major index reforms. The S&P 500 will rebalance on Friday, one of the four days of the year. Friday’s restructuring will see record levels of trading activity due to Tesla’s addition to the S&P 500.

In addition to the S&P restructuring, several major ETFs will be restructured on Friday, including the Invesco QQ Trust (QQ) and the Renaissance Capital IPO (IPO), which are coded with the red-hot NASDAQ 100. A tear due to the urgency of the recent IPOs and recently hit $ 700 million in assets under management.

Restructuring usually involves weight changes for companies listed in the codes, but it also includes additions or deletions in the codes (called “restructuring”). Mutual funds, ETFs and others seek to reflect the behavior of the index and then buy or sell shares at a ratio of their weight to the index.

Some companies will need to rearrange and rearrange the codes as they no longer comply with the rules or guidelines of the code. Others who are not in the code will meet the criteria for inclusion.

Some restoration is done semi-annually, quarterly or monthly. Some codes rearrange all in one day, some spread the trade over several days.

In the case of the S&P 500, rebalancing is done four times a year. In the case of Russell 1000 and Russell 2000, rebalancing is done once a year.

Determining whether to go into a code is a complex matter. Some use “mechanical” methods that automatically place stocks in the index if they meet certain criteria. For example, the Russell 1000 will cover 1,000 largest shares in the United States. The S&P 500, on the other hand, is selected by a group that wants to include the largest companies in the United States. Inclusions are weighed by market capitalization.

Index rebalancing is important because so much money is now tied to these codes. The SPDR S&P 500 (SPY), the world’s largest ETF, has more than $ 320 billion in assets under management. This ETF seeks to monitor the performance of the S&P 500. The ETF issuer (in this case, State Street Global Advisors, which operates the SPDR), licenses the S&P500 code from the S&P Dow Jones codes. When rearranging the code, the issuer (in this case, the S&P Dow Jones codes) tells the provider (in this case, State Street) what changes are being made. The issuer must decide what to buy or sell and how to make the transaction. That transaction results in a significant amount of trading activity.

The Nasdaq 100 Index contains the 100 largest non-financial institutions listed on the Nasdaq and is based on the Invesco QQ Trust ETF (QQQ). It readjusts four times a year, but companies are added to the index (“restructured”) or removed only once a year. That restructuring will occur on Friday after the closure. Over the weekend, Nasdaq announced that six companies would be added to the index, and six more were eliminated.

The six companies going in are: American Electric Power Company (AEP), Marvel Technology Group (MRVL), Match Group (MDCH), Octa (OKDA), Pelton Interactive (PT). ON), and Atlasian Corporation (Team).

Removed Six: Biomer Pharmaceutical (PMRN), Citrix Systems (CDX), Xpedia Group (XPE), Liberty Global (LPDAA / LP DOYK), Take-to-Interactive Software (DTWO), and Ulta Beauty (ULDA).

Investors who are benchmarked for the Nasdaq 100 should buy the added shares and sell the defunct ones. As the influence of passive investment grows, the amounts invested – and the amount of trading around the equilibrium – grow significantly.

The Invesco QQQ Foundation (QQQ) is the fifth largest ETF in the United States with approximately $ 150 billion in assets under management. The Nasdaq 100 Index is a benchmark for a wide range of additional financial products such as options and futures.

Because of its size, indexes affiliated with the S&P500 are expected to buy Tesla for about $ 80 billion to add Tesla to the S&P500, which means providers will have to sell $ 80 billion of the remaining shares in the S&P500. This alone would be the biggest restructuring in S&P history: previous post. 50.8 billion in September 2018. Will be 1% of the market capitalization of the Tesla S&P500.

All of this trading – and money – sets up a risky game of cat and mouse between the people who have to buy and sell the shares (those tied to codes such as ETFs and mutual funds) and the people who can buy or not buy. Sell ​​to them (brokerage community).

Howard Silver Platt, senior index analyst at S&P Dow Jones Index, told me that “the goal of the markers is to buy Tesla and sell other companies closer by the end of next Friday.”

This, in turn, conflicts with indexers with the trading community, says Silver Flat: “If you are a trader or investor, your goal is to buy or sell indexers at a profit.” To ensure they have the right balance of shares, providers often conclude deals with brokerage houses to issue shares that are to be bought or sold on the trading date.

“Indexers pay a fee to the trading community to ensure they can get at least a fraction of the shares they need,” Silver Platt noted. “That’s part of the cost of doing business.”

On a fundamental basis, this tsunami of trade should not change prices because there is no change in the business of the listed companies. However, there are significant changes in supply and demand provided by the addition or exclusion of the index, and this can affect prices.

This is what causes these events to be a bit nervous, especially when you are dealing with big things like Tesla, which is a little uncertain.

“The truth is, we don’t know what will happen,” Silver Flat told me.

Ben Johnson, head of global ETF research for the Morningstar, says previously obscure index providers are now key players in determining who owns the investment world.

“These index providers are so much more than index providers – they are effective portfolio managers,” Johnson told me. “They are not property managers, but they determine where the money goes through their decisions about who goes out within these codes.”

As a result, index groups for key providers – whether they are S&P, NASDAQ, FTSE, or MSCI – have become more influential: “These indexes have become one of the planet’s most preferred asset managers,” Johnson said. Told me.

Subscribe CNBC Pro For exclusive intelligence and analysis and live business day programming around the world.