Last month, Meredith blogged about Nasdaq’s proposal to offer “Fast Entry” to its Nasdaq 100 Index for mega-cap IPOs. This excerpt from a recent WSJ article summarizes how the proposal would work:

Consider a company whose total market capitalization is large enough to rank among the 40 biggest in the Nasdaq 100. Under the rule proposal, if that company does an IPO for less than 10% of its shares outstanding, it would enter the index at a weight of five times the market value of its freely tradable shares.

Say what?

If a company with a total market capitalization of $1 trillion floated only 5% of its stock in an initial offering, that would be $50 billion in freely tradable shares. Under Nasdaq’s proposal, the basis for weighting the company in the Nasdaq 100 index would be five times greater, or $250 billion.

In current market conditions, this company with $50 billion in freely tradable shares—multiplied by a factor of five—would immediately hurdle into the top third of all stocks in the index.

Nasdaq’s proposal – which is in the consultation phase – is made in contemplation of some mega-IPOs that are likely to come down the pike this year, including SpaceX (which has reportedly conditioned its willingness to list on Nasdaq on adoption of the proposal), Open AI, and Anthropic. However, the proposal’s going over like a lead balloon with some institutional investors. Here’s another excerpt from the WSJ article:

The likely result, several asset managers tell me, is that with the company looming five times larger in the benchmark, index funds and other big investors would be under pressure to buy more of the stock, giving an artificial boost to its performance.

If Nasdaq adopts the proposed rule, “you’re creating false demand that’s going to affect the stock price because of the lack of liquidity,” says Ken Mertz, chief investment officer at Emerald Advisers, an asset-management firm in Leola, Pa. “Higher demand would create greater volatility and potential harm to market efficiency. And it would bring more speculation into the marketplace.”

Other commentators are more blunt in their criticism. For example, Michael Burry, of “The Big Short” fame, says that George Noble’s Substack piece on the proposal is a must read. Mr. Noble kicks off his critique with a statement that “This is the most SHAMELESS structural manipulation of a major index I’ve ever seen. . . ” Spoiler Alert: He doesn’t get more positive on the proposal from there.

– John Jenkins