(Image credit: ANGELA WEISS/AFP via Getty Images)
SpaceX and OpenAI are gearing up to go public in what would be the biggest initial public offerings (IPOs) of all time, and Nasdaq (NDAQ) can hardly wait.
The exchange operator rolled out new “fast entry” rules that will allow it to speed up the process of adding such massive companies to its flagship Nasdaq-100 index. Ordinarily, it can take up to a year for a mega-cap stock to be included in the Nasdaq-100.
Under the new rules (PDF), which go into effect on May 1, newly public mega caps would be eligible for inclusion after just 15 trading days – and with only five days of prior market notice.
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That’s important for a number of reasons. The Nasdaq-100, which comprises the 100 largest non-financial companies in the Nasdaq Composite, is tracked by exchange-traded funds with more than $800 billion in assets. A longer waiting period informs price discovery.
For one thing, the delay stops hedge funds from front-running ETF investors. Under the new rules, hedge funds could buy the stock on the day of the IPO and then flip it to passive investors just 15 days later. That’s basically a wealth transfer from long-term index investors to fast-money pros.
Another issue: when a company is added to an index, institutional buyers are forced to buy shares. The Invesco QQQ Trust (QQQ), the largest Nasdaq-100 ETF with $430 billion in assets under management (AUM), will have no choice but to buy these newly issued stocks just two weeks after they go public. With shares still riding the post-IPO pop, it’s fair to say passive investors won’t be getting the best price.
And let’s not forget insiders, who under the old rules had a 90- to 180-day lockup period. Under the new rules, they could sell when the stock is artificially propped up by forced buying.
Put it all together, and research shows that the fast entry process could allow newly public companies to raise 6% more capital – and that capital would come at the expense of index investors.
SpaceX is targeting an IPO in June, with a valuation between $1.75 trillion and $2 trillion. OpenAI, which could go public as soon as the fourth quarter of 2026, is valued at more than $850 billion. With those sorts of eye-watering figures, you can see why so many voices are crying foul.
“This is the most shameless structural manipulation of a major index I’ve ever seen,” writes George Noble, chief investment officer of Noble Capital Advisors. “Indexing used to be brilliant because you were free-riding on the price discovery of active managers. Now, the index is the market.”
When trillions of dollars flow blindly into whatever the rules dictate, “your 401(k) is the exit liquidity. This is the fundamental corruption of indexing,” he adds.
