Traders went gaga for Google last week on news the Internet-search company was joining the ranks of blue chips and would be added to the Standard & Poor's 500 Index.
But Google's new place in the index has the potential to create trading havoc. In fact, it already has.
Its addition to the index, slated for Friday, means funds that track the S&P 500 have to buy Google shares. Because Google's stock-market value is so high, those funds will have to buy heaps to meet the obligation. It turns out they won't need to buy quite as many as many traders originally thought.
The S&P 500 is a "float weighted" index. That means a company's prominence in the index is determined by the value of shares available to the public. In the case of Google, a big chunk of shares aren't publicly available. Instead, they are held as a separate class by founders Larry Page and Sergey Brin as well as other insiders.
The information S&P first provided on Google last week left many Wall Streeters thinking the company would go into the S&P 500 index as if all its shares -- including the ones held by insiders -- were freely floating. But the announcement was misinterpreted, says S&P managing director David Blitzer. Insider shares aren't counted.
Instead of needing to buy about 28 million shares, index funds will need 18.8 million, according to Credit Suisse's derivative strategy group. When S&P corrected the misimpression, a flurry of selling resulted. In 15 minutes on Friday, the share price fell to $363.70 from $368, a 1.2% decrease.
Wall Street trading desks, which were buying up shares to deliver to index funds, can't have been happy.
The big switch could cause other disruptions.
The 18.8 million shares in play amount to about $6.9 billion of Google stock, based on Friday's close. The departure from the index of Burlington Resources, which has been acquired by ConocoPhillips, will free up about $1.6 billion. That means funds will need to come up with an additional $5.3 billion to buy Google shares.
To make the transition, the index funds are going to have to sell other stocks, says Diane Garnick, an independent quantitative analyst in New York.
That isn't a bullish development for the rest of the market. She thinks one smart trade may be to bet against the S&P 500 on the day before Google gets added to the index.
This is good for the long because as long as fund managers sell other stocks to buy GOOG; this will make GOOG to go up more. This is a bullish sign not a bearish sign. The real main reason that make GOOG to go up more is because there is not alot of shares for index fund to buy to fullfill their obligation in S&P 500 index; so this make GOOG volatile to the up side. I owned 600 shares of GOOG and I am not going to sell until it is at least 400.