Comments on: Counterparties A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: TFF Mon, 02 Jan 2012 00:27:47 +0000 Thanks, realist. I still have trouble trusting index funds, but given their popularity it is comforting to know that people have given thought to at least some of the potential flaws.

By: realist50 Sun, 01 Jan 2012 20:01:42 +0000 TFF – yes, there are protections. S&P, to take a particularly relevant example, weights most of its indices based on capitalization that reflects float only – excluding shares held by “control groups, other publicly-traded companies, and government agencies” – rather than all outstanding shares. The intent is to avoid exactly the problem that you discuss.

Details are in S&P’s “Float Adjustment Methodology” white paper at this link – index-library/en/us

By: TFF Sun, 01 Jan 2012 04:04:08 +0000 I’ve been wondering about a question…

Is there the potential for index funds to drive IPO values without regard to the value of the underlying company?

Take the Groupon IPO as an example — I believe the IPO sold just 6% of the outstanding shares. The trading in those shares presumably will help find a value for the remaining 94%.

But as soon as Groupon is added to an index, perhaps in a year (?), then the funds tracking that index will be strongly encouraged to buy in. If 10% of the money in the market were indexed, then there would presumably be fierce competition for the 6% of the shares that are actually trading, with the shares trading at almost any price. No? Are there any protections in the system against this happening?