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End-to-end index analytics for S&P and Russell indices

2
Full-time resources – initial project.
5
Full-time resources – extended scope.

CLIENT

A mid-sized European bank.

OPPORTUNITY

Our client was seeking end-to-end index analytics for the S&P and Russell indices. The requirement included tracking of index rebalance events, index rebalancing reporting, and exchange circulars.

The client also wanted to monitor the behavior of US stocks at the following points of time:
  • Immediately after the release of the due data date.
  • 1-3 weeks after the release of the due data date.
  • 1-6 weeks before the rebalance dates.
  • 1-6 weeks after the rebalance dates.

SOLUTION

SG Analytics started off with a two-member team to support the client’s core trading team in the following areas:
  • Build an index rebalance tracker which would incorporate all announcements. circulars, etc. and store in a common repository for S&P and Russell indices.
  • Track the index rebalance mechanism and check for due data dates. S&P has a quarterly rebalance mechanism and Russell has an annual rebalance mechanism.

IMPLEMENTATION

Due data date announcement:
  • Run index inclusion and exclusion rules, which are likely being used by the exchange on Bloomberg data.
  • Pass suggested inclusions/exclusions along with criteria would be sent to the client’s trading desk for review.
  • Mutual finalization of stocks which would be highly probable for inclusions/exclusions.
  • Calculation of inclusion/exclusion weights, average daily turnover, and days to trade ratios for each stock.

1-6 weeks from index rebalance date:
  • Track average daily volumes of inclusions/exclusions vis-a-vis their historical averages
  • Report stocks with highly deviating volumes that are part of probable rebalances
  • Report changes in the circular or chance in index mechanisms

7-0 days from index rebalance date:
  • Increase interaction frequency with the client significantly.
  • Closely monitor mean reversion possibilities in the level of beta-adjusted outperformance of inclusion stocks and underperformance of exclusion stocks.

Post rebalance date:
  • Create detailed analysis and report of tracking errors in the index rebalances
  • Explore the stock behavior and trade ideas of possibly shorting the inclusion stocks and buying the portfolio of exclusion stocks as long-short basket
  • Submit the complete post-rebalance trade analytics on the level of outperformance or any deviation from it.
2
Full-time resources - initial project.
5
Full-time resources - extended scope.

Value Delivered

►
1
The client achieved almost 70% accuracy in index prediction levels in the S&P Index and about 73% in the Russell Index prediction.
►
2
The client was able to conduct a continuous stock monitoring, without losing out on notes and circulars released by index companies and hence was able to suggest more accurate trading ideas to their end-clients.
►
3
The accuracy of trading ideas prompted the client to expand their reach to hedge funds with more conviction.
►
4
The client eventually added the DOW Index and a few MSCI indices to its portfolio and increased the number of full-time employees from 2 to 5 with SG Analytics.
 

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