Who Really Wins in the SpaceX IPO?

A $1.75 trillion IPO is about to hit the market, and the mechanics behind it could leave retail investors holding the bag. In this episode of Through the Noise, Cam Harvey breaks down how SpaceX's Nasdaq debut triggers a wave of forced index-fund rebalancing, and why recently waived listing rules amplify the distortion. With only 4% of shares trading freely, a little-known Nasdaq provision counts SpaceX at three times that weight, pushing demand and the price artificially higher. Drawing on his research into the unintended consequences of rebalancing, Cam explains why the spike is only temporary, how the correction unfolds, and the asymmetric information gap that leaves everyday investors dangerously exposed. If you are tempted to buy into the hype, understand the mechanics first.

Transcript

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Thanks again for joining us for another episode of Cam Harvey's Through the Noise. Cam, um we spent a good deal of time in a prior episode talking about SpaceX. And uh I thought, at least for me, it would be very interesting for us to dig deeper into that. One of the insights we are getting to is how the IPO will be a loser for the retail investors. And we went a little bit into that, but I was hoping you could shed more light to me and to our viewers on why that is. Yeah, so last time we scratched the surface as to what's going on. And let me kind of step back and go through the logic of how this will work. So the idea is that this is a giant IPO. So based upon 1.75 trillion market capitalization, this would be like the eighth largest stock in the market, even though it's just debuting. So this is a big deal. And there are many index funds that need to rebalance to incorporate uh SpaceX. And what we worry about is uh price pressure, putting the price up potentially temporarily, um, but this uh potentially this buying pressure leads to uh a temporary uh increase. So uh some people say, well, what's the big deal? These index funds hold the market. Well, there are very specific details that are important here. So this is a stock that will be launched on Nasdaq. It has got fast tracked to be included in the Nasdaq 100. So previously, NASDAQ had rules in terms of the minimum amount of time that you're trading before you're included, like three to twelve months. Now that's 15 days. And NASDAQ used to have a requirement that the amount of freely tradable float needed to be at least 10%. Well, that's been waived to allow SpaceX at 4% uh to be included in the index. However, there's something else that uh is in the fine print here. So even though SpaceX's float, and that's the stuff that's available to investors, is only 4%. The new NASDAQ rule, if the float is less than 33%, then what's counted for the index weight is three times the float. So it's not four percent, it's 12%. This will lead to a distortion and potentially uh have a positive and again a temporary uh effect on the price. So Russell has also changed their rules. Um SP is considering changing the rules, and then these are significant changes. So with the SP uh index, uh you need to be trading for a year under current uh rules uh before you're considered uh you know a candidate uh for inclusion. So the SP and Russell indices are based upon the free float weight. NASDAQ, given they change the rule, it's three times that weight. And again, that's where the distortion comes from. And can I ask you just one follow-up? You you you use the word temporary distortions. Why why temporary? So it turns out that, and the timing is remarkable. I've got two academic papers that are relevant to this situation. And last week we talked about uh fundamental growth that was recently published a couple of weeks ago. Um, but there's another paper that I've got, and it's called The Unintended Consequences of Rebalancing. And this is exactly what's happening uh today. It is index funds rebalancing. And there is a robust academic literature on rebalancing, and uh the usual sort of papers look at uh index additions and deletions, and find on average that those effects in the short term have diminished through time. But I'm not sure. I want to apply the average to SpaceX. SpaceX is far from the average. And then my paper that looks at larger forces where we're talking about pensions rebalancing from a 60-40 equity fixed income mix. And what we do is to trace the impact of these giant trades. And really, this is highly relevant for uh SpaceX. And my research shows that these rebalancings can have very significant short-term effects, and eventually they dissipate. So think of this as the IPO opens, the price goes up, the retail investors start to buy, and then the price corrects. So the temporary uh impact is reversed, and the retail investors are left holding the bag. That's interesting. That is a tough thing for uh retail investors to really ingest. And it sounds like there's a bunch of asymmetric information because you have a lot of information about these mechanics. The retail investors do not have that. Yeah, it is unfortunate. Um, and I can see how this is going to play out. And and just to be specific about the mechanics, so on June 11th, the day before the IPO, there'll be kind of a benchmark uh set uh for the price. And then at 4 a.m. Eastern time, uh the pre-market opens. And this is a market that's usually illiquid, but you get some information about how the price is evolving relative to the benchmark set the day before. The pre-market trading goes from 4 a.m. to 9 a.m. And then there's a shutdown for a half hour, and then NASDAQ opens at 9.30. Uh I'm on Bloomberg Radio at 7.25, and it's a very interesting time uh to be on the radio just uh basically two hours before uh the open. So this is how it will work, and we'll see what happens at the open. And again, this is this is very uh impactful uh in terms of the size and the consequences for all those investors that really want a piece of SpaceX uh could be quite negative. Well, this is going to be a very interesting story for us to watch as it plays out. I know we can never predict the future, but understanding the underlying mechanics and fundamentals of this is fascinating, and thank you for sharing those insights with us. Thank you.