Nasdaq mulls new ‘fast entry’ rule ahead of big IPOs such as SpaceX’s

[NEW YORK] The owner of the Nasdaq 100 Index is proposing to speed up the inclusion of newly listed, large-cap firms in the widely followed equity benchmark, as a flurry of technology giants are slated to go public this year. 

Dubbed as the “fast entry” rule, the planned revision would allow a new listing to join the Nasdaq 100 after the first 15 trading days, Nasdaq said. This is shorter than the current waiting period of at least three months. 

The move highlights the pressure on index providers to adapt to a world where companies wait much longer to list, putting enormous amounts of market value in play as soon as they enter public hands.

Among the companies expected to make initial public offerings (IPOs) this year is SpaceX, whose potential US$1.3 trillion valuation would make it one of the biggest companies in the Nasdaq 100. 

Kaasha Saini, head of index strategy at Jefferies, said: “There could be (concerns) that passive funds will be missing out in a scenario where the new stock does rally even further, and then requires higher turnover when adding it in.

“The proposed change would make the index more representative of the market in a timely way.” 

The Nasdaq 100 is directly benchmarked to more than US$600 billion in exchange-traded funds (ETFs) globally, and has been a key stock-market gauge as the artificial intelligence boom delivered massive gains to the largest tech companies.

With the Nasdaq vying for IPOs against rivals such as the New York Stock Exchange, the scale of the index funds tied to the Nasdaq 100 is likely to help its pitch to woo new listings. 

Other index managers such as MSCI have already adopted approaches that ensure a large IPO can be included not long after its debut.

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In contrast, an entry to the Nasdaq 100 now requires three months of seasoning, during which the stock establishes sufficient liquidity and price stability, and only occurs during December’s annual reconstitution. 

The “fast entry” rule is part of an industry consultation set to conclude later in February. If Nasdaq’s index-management committee approves it after soliciting the input, the change will take effect after the upcoming quarterly rebalance in March.

Nasdaq said in a statement: “As corporate structures evolve and index-linked assets under management continue to grow, it’s increasingly important that the methodology ensures (the) timely inclusion of the largest Nasdaq-listed non-financial companies, and maintains replicability for passive managers.”

Invesco, whose US$410 billion Nasdaq 100-tracking ETF is the largest of its kind and known by its ticker QQQ, calls the proposal the latest sign of Nasdaq’s commitment to innovation.

The fund manager said: “Evolution is a necessary element to ensure rules-based indices adapt to the changing market environment.”

To ensure the inclusion of the largest companies, Nasdaq also proposed calculating a market capitalisation based on both listed and unlisted shares, rather than only listed shares currently.

Yet, that will not affect the companies’ weightings in the index, since that will continue to be determined by the value of the shares eligible for listing on the exchange.

Another planned revision involves a stock’s free float, or the amount of shares available for trading.

While the minimum 10 per cent float requirement for eligibility will be removed, a new approach is designed for including companies whose shares are mostly owned by corporate insiders or restricted for trading.

Specifically, those with free float below 20 per cent will have their corresponding market value multiplied by a factor of five, with a cap at 100 per cent, when their index weight is calculated.

That way, low-float stocks can preserve investability for funds that use the Nasdaq 100 as a benchmark. 

Antti Petajisto, head of equities at Brooklyn Investment Group, said: “Apparently the idea is to keep low-float firms in the index if they are economically large enough.” BLOOMBERG